The "$100 loan" prompt is a classic 3-statement interview question, and it rewards candidates who answer it with a structure, not a stream of consciousness. Here's a four-step framework you can reuse for this question and for most other "walk me through what changes" prompts.
Step 1: Separate the Transaction From Its Ongoing Cost
Before touching any numbers, say out loud that this question has two parts: what happens the moment the loan is issued, and what happens afterward as it accrues interest. Naming this distinction upfront signals to the interviewer that you're not going to conflate a financing event with an operating one.
Step 2: Walk Through the Immediate (Day 0) Impact
On day one, a $100 loan is purely a balance sheet event:
- Cash rises by $100 (asset side)
- Debt rises by $100 (liability side)
Say explicitly that Net Income is unaffected and the balance sheet still balances because both sides moved by the same amount. This is worth stating even though it sounds obvious — it's the detail interviewers listen for.
Step 3: Layer In the Interest Expense
Once you've covered Day 0, move to the ongoing effect: the loan accrues interest. Using an illustrative 5% (0.05) rate on the $100 loan gives $5.00 of annual interest expense. State the formula out loud — Interest Expense = Loan Amount × Interest Rate — before plugging in numbers; interviewers want to hear the logic, not just the answer.
Step 4: Don't Forget the Tax Shield
This is the step that separates strong answers from average ones. Interest expense is tax-deductible, so the actual hit to cash and Retained Earnings is the after-tax interest, not the full pre-tax figure. At a 25% (0.25) tax rate, $5.00 of pre-tax interest becomes a $3.75 after-tax reduction to Net Income, Cash Flow from Operations, and Retained Earnings. Candidates who stop at the pre-tax number are giving an incomplete answer even if their formula was right.
Putting It Together
| Item | Effect |
|---|---|
| Day 0 Cash | +$100.00 |
| Day 0 Debt | +$100.00 |
| Year 1 Interest Expense (pre-tax) | $5.00 |
| Year 1 Net Income Impact (after-tax) | -$3.75 |
| Year 1 Ending Cash (incl. interest) | $1,096.25 (from a $1,000 starting balance) |
For the full worked version of this answer — including the starting balance sheet, the assumptions you're allowed to state out loud, and the complete after-tax cash flow bridge — go through 3-Statement Change: Take Out a $100 Loan line by line.
Common Ways Candidates Lose Points on This Question
- Putting an income statement impact on Day 0, before any interest has accrued
- Using the pre-tax interest expense as the cash and Retained Earnings impact instead of the after-tax figure
- Double-counting the $100 by running it through both Cash Flow from Financing and Cash Flow from Operations
- Assuming the loan amortizes (reduces Debt) when the question specifies an interest-only loan
Practice the Rest of the "$100 Change" Family
Interviewers rotate through several variants of this prompt, and each one tests a different mechanical link between the statements: a revenue increase, a depreciation increase, and an inventory purchase for cash. Working through all of them back to back is the fastest way to build the pattern-recognition interviewers are actually testing for.