📦Level Basic - IB Technical #3

Welcome to the 3rd edition of Daily Technical Questions presented by TheFinanceGrind

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TODAY’S TECHNICAL INTERVIEW QUESTION

💬Walk me through how Depreciation going up by $10 would affect the three financial statements.

“If Depreciation goes up by $10, it first hits the Income Statement. EBIT drops by $10, and assuming a 20% tax rate, Net Income falls by $8. On the Cash Flow Statement, Net Income is down $8, but we add back the $10 of Depreciation since it's a non-cash expense. That means Cash from Operations—and overall cash—goes up by $2. On the Balance Sheet, cash increases by $2, but PP&E goes down by $10 due to the higher depreciation. So total assets are down by $8. On the other side, Retained Earnings in Shareholders’ Equity also falls by $8 because of the lower Net Income. The balance sheet stays balanced.

❌ Common Mistakes for Newbies

Forgetting to Add Back Depreciation
→ It’s non-cash, so always added back on the CFS.

Thinking Cash Always Follows Net Income
→ Not true here—cash actually goes up even though Net Income drops.

Missing the PP&E Drop
→ More depreciation = lower asset value.

Not Updating Retained Earnings
→ Net Income affects equity—always reflect it on the balance sheet.

⚡ TL;DR (Quick Recap for Newbies)

Income Statement:
Depreciation ↑ $10 → EBIT ↓ $10 → Net Income ↓ $8 (with 20% tax)

Cash Flow Statement:
Net Income ↓ $8 + Add back Depreciation $10 → Cash ↑ $2

Balance Sheet:
Cash ↑ $2, PP&E ↓ $10 → Assets ↓ $8
Equity ↓ $8 → ✅ Balanced

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