"Walk me through what happens to the three statements if Depreciation increases by $100" is one of the most common accounting mechanics questions in finance interviews — asked at bulge-bracket banks, mid-market shops like Lincoln International and Houlihan Lokey, and by PE funds screening for basic modeling literacy. It's a short question, but it's designed to expose candidates who have memorized definitions without understanding how the statements actually connect.

What the Interviewer Is Actually Testing

This question isn't really about depreciation in isolation — it's a linkage test. A strong answer needs to move through four things, in order, without getting the direction of any single one wrong:

Income Statement: EBIT falls by the increase in D&A, and Net Income falls by the after-tax amount. Cash Flow Statement: Net Income is lower, but D&A is added back in full as a non-cash item, so Cash Flow from Operations actually rises. Balance Sheet: PP&E falls by the D&A increase, cash rises by the net cash benefit, and Retained Earnings falls to match the Net Income hit — so both sides stay in balance.

A Step-by-Step Way to Structure Your Answer

Interviewers consistently reward candidates who work through the mechanic in a fixed order rather than jumping around. A reliable structure:

1. State the EBIT impact first. D&A is an operating expense, so a $100 increase reduces EBIT by exactly $100 — no tax adjustment yet.

2. Move to Net Income. Subtract interest (unchanged) and apply the tax rate to get the after-tax hit. At a 25% (0.25) tax rate, a $100 EBIT reduction becomes a $75 Net Income reduction.

3. Reconcile to cash flow. Start from the new (lower) Net Income and add back the full $100 of extra D&A. Net effect: Cash Flow from Operations goes up by $25 — the tax shield.

4. Close the loop on the balance sheet. PP&E falls by $100, cash rises by $25, and Retained Earnings falls by $75. Assets move by −$75; Liabilities + Equity also move by −$75. Stating this explicitly — not just asserting "it balances" — is what separates a strong answer from an average one.

You can walk through every one of these steps with real numbers, an explicit given-data table, and a full balance check in 3-Statement Change: Depreciation Increases by $100, which is built exactly around this interview question.

Common Ways Candidates Lose Points

The most frequent mistake is assuming Net Income and Cash Flow from Operations move in the same direction — they don't, and stating otherwise is an immediate red flag for an interviewer. A close second is forgetting to apply the tax rate at all (treating the cash flow benefit as the full $100 instead of just the tax shield), and a third is stopping at the cash flow statement without ever touching the balance sheet, even though "walk me through the three statements" explicitly asks for all three.

Build the Foundation First

This question assumes fluency with each statement individually before combining them. If any of the individual statements still feel shaky, it's worth working through Walk Me Through the Income Statement, Walk Me Through the Balance Sheet, and Walk Me Through the Cash Flow Statement, then the full linkage case, Connect the Three Statements, before attempting scenario-based changes like this one.

Where This Shows Up Later

The same D&A tax-shield logic reappears throughout a finance interview process — in unlevered free cash flow build-ups for a DCF, in LBO debt schedules where D&A drives the cash available for debt paydown, and in CapEx-versus-expense questions. Getting the sign and magnitude right here, cold, is what lets you move quickly through those more complex questions later instead of re-deriving the mechanic from scratch each time.