When you are asked a technical question in an interview like "How would a $10 decrease in depreciation affect the three statements?" would it be okay to sketch it out a rough income statement as a guide for myself before walking the interviewer through it? Or is some of the value of the question that I should know the answer so well I can recite it like the Lord's Prayer?
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Just explain what it does starting with income statement. it doesn't affect anything above EBIT
you should understand it well enough that you can just speak through it as each effect runs through the statements? Memorizing the answer and only that answer can screw you if they decide to ask a different r accounting question to see if you know your shit
You should be able to recite this. Sketching something down would take too long and is definitely non-standard.
if you truly understand the WHY behind each of the changes then it shouldn’t be difficult to walk through it verbally. If that isn’t the case for you, then you need to study more and dig a bit deeper.
Thank you very much for the help!
This is correct if the question was if depreciation expense went up by $10, but I think OP asked if it went down by $10. Your logic and reasoning for the former case is right. Just to answer OP's question.
IS: EBIT goes down by $10 and assuming a marginal tax rate of 40%, net income falls by $6.
CFS: Net income flows into CFO. Depreciation expense is a non-cash expense, so when it goes up, you add it in CFO. Since it's going down, we subtract in CFO. 6-10= -4 so CFO falls by $4. No other changes to CFS so net change in cash is down 4 dollars.
B/S: Cash is down by $4 and PPE is up $10 (remember that the journal entry for depreciation expense involves accumulated depreciation as the other account, which is a contra account to PPE). Assets are down by $6 (4-10). Net income flows into retained earnings, which is also down by $6. Retained earnings is a SE account. Assets and SE are both down by $6 so we are matched.
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