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Fancy answering this accounting question asked in investment banking interviews❓
Probably one of the most oft-repeated questions some of our 8-week students get on their interviews is...
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How does £10 increase in depreciation expense flow through the three financial statements❓
Solution:🧪
🧾 Income Statement:
A £10 increase in dep expense should decrease net income by £10.
But hang on ✋
If we take taxes into consideration then @20% tax rate ..
..an increase of £10 dep expense will reduce the tax bill by £2 so..
Net Income will reduce by £8.
🧾 Balance Sheet
On Assets: 📠
PP&E will reduce by a further £10
Cash will go up by £2 given lower cash taxes
So total assets = -£8
On Liabilities: 🎰
Net income will be lower by £8 reducing retained earnings under Equity by £8
🧾 Cash Flow Statement:
Lower Net Income of £8
Higher D&A expenses of £10 will be added back to CFO given D&A is non-nash expense.
On a net basis, CFO will be higher by £2.
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