IB InterviewTechnical
$10 depreciation impact
Show how a non-cash depreciation change flows through the three statements.
Direct answer
Depreciation lowers EBIT and taxes, increases cash from operations, and reduces PP&E with neutral total cash change.
Step-by-step
Walk through the structured answer
1
Income statement
EBIT falls by $10; assuming a 25% tax rate, net income drops by $7.50 (tax savings of $2.50).
2
Cash flow statement
Net income down $7.50, add back $10 depreciation; cash from operations increases $2.50.
3
Balance sheet
Cash up $2.50, PP&E down $10; retained earnings down $7.50. Assets and equity+liabilities both decrease $7.50.
Pitfalls to avoid
- Forgetting the tax shield and only reducing net income.
- Missing the link between PP&E decrease and retained earnings change.
- Mixing up cash impact direction on the CFS.
Follow-up angles
- How does this change deferred tax balances?
- What if the company is in a loss position?
- How would this flow under accelerated tax depreciation?
Related questions
Keep drilling the set
Put this answer into a mock interview
Launch the simulator or jump into the dedicated prep path to rehearse this flow with real-time feedback.