Three Statement Changes & Effects Interview Questions
Hey guys,
I find that one type of technical interview question that gives me a lot of trouble on the spot is usually something along the lines of "walk me through what happens when x item (inventory/AR/depreciation expense etc.) goes up/down".
How I should better prepare for these sorts of questions/are there handy practice excel models that better illustrate these changes and effects?
Thanks!
There are quite a few of these questions/answers in the forum. Personally I also used to have a bad time with this type of question, what I did was looking for as many questions with its (correct) answer and trying to figure them out.
What's best is to get the logic, no use in memorizing.
I remember I did my best to memorize this question when I began interviewing for finance roles (IB/Investing focused) and I got totally tripped up when I forgot one of the account changes on the classic "Depreciation Change" question.
That actually encouraged me to add accounting as a major when I was in school (even though in hindsight, I did not really need to do so, but just needed a few classes). While I do not think you need to add accounting as major (assuming you are in school), there are few resources you can use in your spare time:
https://www.learnaccountingforfree.com/
https://www.accountingcoach.com/
Financial modelling tools (from WSO and M&I) could also help, but bear in mind you need to understand why you are making the change to an account and not just making the change because the numbers need to work.
With practice and understanding, you should be able to flow through the changes for all three statements. One bit of advice is to think through changes starting with IS then CF and finally BS.
So for instance, if depreciation increases by $100 (assuming 30% tax):
Income Statement Depreciation - Higher by $100 Taxes - $30 Net Income - Lower by $70
Cash Flow Statement Net Income - Lower by $70 Depreciation - Higher by $100 (added back since it is a non-cash charge)
Note: No other changes to Cash Flow from Operation Activities and no impact to Cash Flow from Investing and Cash Flow from Financing Activities
Net Cash: Higher by $30
Balance Sheet Cash: Higher by $30 PPE -Lower by $100 due to Depreciation
Assets Lower by $70
Liabilities No Change
Equity Retained Earnings - Lower by $70
Liabilities & Equity - Lower By $70
So both sides Balance in the Balance Sheet
Hope this helps!!!
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