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Three-Statement Linker

“Depreciation goes up by $10. Walk me through the three statements.” The most asked technical question in finance interviews, with a fresh event every time: depreciation, a credit sale, a write-down, capex, a buyback, a drawdown. Fill in the change on every line of the income statement, the cash flow statement and the balance sheet, check each statement, and see the walk written out in the order an interviewer expects.

Eighteen events, a 25% tax rate throughout, and a balance check that turns green only when your own balance sheet balances. Lines that do not move still need a zero: knowing what stays still is half the answer.

The three statements
change on each line, $
1. Income statement
Revenue·
Opex·
D&A·
Interest·
Pre-tax·
Tax·
Net income·
2. Cash flow statement
Net income·
Non-cash·
ΔWC·
CFO·
CFI·
CFF·
Δ cash·
3. Balance sheet
Cash·
Other CA·
PP&E·
Total assets·
Current liab.·
Debt·
Equity·
Total L+E·
Assets = L + E
Enter both sides to check
0 of 3 statements checked
The question

“Depreciation goes up by $10. Tax rate 25%. Walk me through the three statements.”

Tax rate
25%, paid in cash in the period
Assumed
The extra depreciation is tax-deductible in the period and nothing else moves.
How to answer
Signed change on every line. An expense rising is positive on its own line; a cash outflow is negative; a line that does not move is 0.

Current period, everything else equal. Blank is not the same as zero: enter a 0 where nothing moves.

1

Income statement

Start here, and say that you are starting here. Name what hits revenue or an expense line, take the tax at 25%, and land on net income.

2

Cash flow statement

Carry net income across, add back anything that was non-cash, then the working capital, investing and financing effects. End on the change in cash.

3

Balance sheet

Cash comes from the cash flow statement, the asset or liability that moved goes on its line, and net income lands in retained earnings. Then prove it balances.

Once the walk is automatic, the Napkin LBO is the same mechanics inside a deal: EBITDA down through tax and capex to free cash flow, then that cash paying down debt, year by year.Open it

Keep going

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