Banking and private equity
Accounting walk-throughs: the three statements
How to answer "walk me through" questions without losing your place: income statement first, then cash flow, then the balance sheet, and always check that it balances.
指南为英文，与面试语言一致。
How the statements link
The income statement shows profit over a period. The cash flow statement turns that profit into cash. The balance sheet is a snapshot at the end of the period. Three links do most of the work in an interview answer.
- Net income is the first line of the cash flow statement.
- Net income, less any dividends, adds to retained earnings on the balance sheet.
- Cash at the bottom of the cash flow statement is the cash on the balance sheet.
The method
- 1
Income statement
Say which lines change and work down to net income. Apply tax at the rate you're given; if none is given, say you'll assume 25%.
- 2
Cash flow statement
Start with the change in net income. Add back non-cash charges (depreciation, amortization, write-downs, stock-based compensation), then adjust for working capital, investing and financing.
- 3
Balance sheet
Cash moves by the bottom line of the cash flow statement. Change the other assets and liabilities affected, and retained earnings by the change in net income.
- 4
Check
Assets must still equal liabilities plus equity. Say it out loud: "both sides fall by $7.50, so it balances."
Worked examples
例题 · The classic
经代码验证Depreciation goes up by $10. Walk me through the three statements. The tax rate is 25%.
查看解题过程
- 1.Income statement: operating income falls by $10. Tax falls by 25% × $10 = $2.50, so net income falls by $7.50.
- 2.Cash flow statement: net income −$7.50, add back depreciation +$10 because it isn't a cash cost. Cash rises by $2.50: the tax saving.
- 3.Balance sheet: cash +$2.50 and PP&E −$10, so assets fall by $7.50. Retained earnings fall by $7.50, so equity falls by $7.50.
答案Net income −$7.50, cash +$2.50; assets and equity both fall by $7.50, so it balances.
例题 · Working capital
经代码验证Customers start paying more slowly: accounts receivable rise by $20 while sales stay the same. What happens?
查看解题过程
- 1.Income statement: nothing. Revenue is recorded when it's earned, not when it's paid.
- 2.Cash flow statement: the increase in receivables is a use of cash, −$20 in operating cash flow.
- 3.Balance sheet: receivables +$20 and cash −$20. Total assets don't change, and nothing else moves.
答案Cash falls by $20; total assets, liabilities and equity are unchanged.
例题 · Debt-funded equipment
经代码验证A company borrows $100 at 5% to buy equipment, depreciated over 10 years. Walk me through the end of year one. Tax is 25%.
查看解题过程
- 1.Income statement: depreciation $10 and interest $5, so pre-tax income falls by $15. Tax falls by $3.75. Net income falls by $11.25.
- 2.Cash flow statement: net income −$11.25, add back depreciation +$10, so operating cash flow is −$1.25. Investing −$100 (the purchase) and financing +$100 (the loan) cancel. Cash falls by $1.25.
- 3.Balance sheet: cash −$1.25 and PP&E +$90 (100 less 10 of depreciation), so assets rise by $88.75. Debt +$100 and retained earnings −$11.25, so liabilities and equity rise by $88.75.
答案Net income −$11.25, cash −$1.25; both sides of the balance sheet rise by $88.75.
提示Say each statement's change in one sentence, then move on. Interviewers mark the structure as much as the numbers.
Variations to be ready for
- An inventory write-down of $10: the same as depreciation on the income statement and cash flow; on the balance sheet, inventory falls instead of PP&E.
- $10 of stock-based compensation: net income falls by $7.50, the $10 is added back as non-cash, cash rises by $2.50, and shareholders' equity gets the $10 back through paid-in capital (so equity rises by $2.50 in total).
- A $10 dividend: no income statement change; financing cash flow −$10; cash and retained earnings both fall by $10.
- Accounts payable up by $10: a source of cash. Cash +$10 and payables +$10.
Common mistakes
常见错误
- Forgetting tax on any change that goes through the income statement.
- Adding back items that are cash costs. Only non-cash charges are added back.
- Getting working capital signs backwards: an increase in an asset (receivables, inventory) uses cash; an increase in a liability (payables, deferred revenue) provides cash.
- Stopping before the check. Always finish by saying the balance sheet balances, and by how much each side moved.
Banking and private equity