If depreciation increases by $10, walk through the impact on all three financial statements. Assume a 30% tax rate.
Answer
income statement: EBIT falls by $10. At a 30% tax rate, taxes drop by $3, so net income falls by $7. Cash flow statement: net income is down $7, but the $10 of depreciation is non-cash and gets added back, leaving operating cash flow up by $3, assuming no other changes to investing or financing, the net change in cash is $3. Balance sheet: cash rises by $3, net PP&E falls by $10 (the depreciation), and on the right side of the balance sheet, retained earnings in your SE drop by $7. Check: assets net to -$7 (-$10 PP&E + $3 cash) and equity is also down $7 — balanced.
Why interviewers ask this
The interviewer is testing three things: whether you can move calmly across all three statements, whether you remember that the BS has to balance at the end, and whether you grasp the broader insight (non-cash expenses create real cash savings via reduced taxes). Common stumbles: forgetting to net the tax impact, getting the direction of the CFS adjustment wrong, or skipping the balance check. Make the math explicit so the interviewer can follow your logic.