Depreciation goes up by $20... (Advanced)
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
14 min read · updated August 31, 2026
Ask around a bullpen for the single most-asked technical and you will keep landing on this one. Not "walk me through the three statements." This one. Depreciation goes up by $20, now walk me through it.
The reason is that the plain three-statement walk can be memorized. Plenty of candidates recite what each statement does, in order, having understood none of it. The moment an interviewer moves one line and asks you to trace it, recitation stops working. You have to actually run the system.
That is why this question is the better filter, and it is why you should treat it as the one technical you cannot afford to be shaky on.
You have already done this walk once. Walk me through the three statements runs the $10 version as its final test, and if all you needed was the mechanics, you have them. This article exists for the four things that one does not do: why cash rose when an expense went up, what happens when the interviewer pushes back, the two questions that solve every variant of this they can invent, and a reference table covering every item they might swap depreciation for. The walk below is the same shape at $20. Skim it if it is fresh, because everything after it is new.
The order is the answer
Walk it in the same sequence every single time:
Income statement, then cash flow statement, then balance sheet, then back to the income statement.
That order is not a memory aid or a stylistic preference. It is the dependency chain, and each step is impossible without the one in front of it. You cannot start the cash flow statement until you know net income, because net income is its top line. You cannot fill in the cash line on the balance sheet until the cash flow statement has produced an ending cash balance. Start anywhere else and you are guessing at a number you have not derived yet, which is exactly how candidates end up plugging retained earnings to force a balance.
The last step is not a fourth statement. It is the one sentence explaining why the balance sheet balanced, and it points straight back at the statement you started on. Almost nobody says it out loud, which is exactly why it is where the offer gets won.
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Frequently asked
- Depreciation goes up by $20, walk me through the three statements.
- At a 40% tax rate: on the income statement, pre-tax income falls $20 and taxes fall $8, so net income falls $12. On the cash flow statement you start at net income down $12 and add back the full $20 of depreciation because it is non-cash, so cash rises $8. On the balance sheet, cash is up $8 and PP&E is down $20, so assets fall $12, and retained earnings falls $12. It balances.
- If depreciation is a non-cash expense, why did cash go up?
- Because of the tax shield. No cash ever went out the door for the depreciation itself, so the only thing that actually moved cash was the smaller tax bill. Cash rises by exactly the charge times the tax rate, which is $20 at 40%, or $8. Set the tax rate to zero and cash does not move at all, which is the cleanest proof that tax is the whole cash story.
- What order should you walk the three statements in?
- Income statement, then cash flow statement, then balance sheet, then connect it back to the income statement. The order is not a preference, it is the dependency chain: you cannot start the cash flow statement without net income, and you cannot fill the balance sheet cash line without the cash flow statement. The last step is naming why it balances, which is that net income drove retained earnings.
- Why does the balance sheet balance in a three-statement walk?
- Because net income drove retained earnings. Net income leaves the income statement and lands in two places: the top of the cash flow statement, and retained earnings inside equity. So the asset side and the equity side move by the same figure by construction, not by coincidence. Saying that out loud, rather than just asserting that it balances, is what proves you ran the system instead of reciting a result.
- How do you answer any 'walk me through the impact' question?
- Two questions decide everything. First, did it hit the income statement? If yes, net income moves by the after-tax amount and that is where tax enters. If no, there is no tax effect at all. Second, did cash actually move? A non-cash charge gets added back in full; cash that moved without an income statement hit shows up as a working capital change, in investing, or in financing. The balance sheet is then forced.
- What happens to the three statements when deferred revenue increases by $20?
- Nothing happens on the income statement, because nothing has been earned yet. On the cash flow statement the increase in the deferred revenue liability is a source of cash, so cash rises the full $20. On the balance sheet cash is up $20 and the deferred revenue liability is up $20, so it balances with no change to equity and no tax effect anywhere.
- Does the answer change if the interviewer says $10 or $100 instead of $20?
- No. The number is decoration and the tax rate is whatever you say it is out loud. The mechanism is fixed: net income falls by the after-tax amount, the full charge is added back, and cash rises by the charge times the tax rate. State your tax rate at the start, keep the arithmetic round, and the size of the number never matters.
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