“Walk me through how the three financial statements connect to each other.”
"Walk me through how the three financial statements connect to each other." This is the capstone of the income statement, balance sheet, and cash flow statement walk-throughs — and the strongest answers show the links with a real change flowing through all three. Using Atlas Manufacturing Inc. from Case 1, Case 2, and Case 3, walk through what happens if Depreciation & Amortization increases by $10.0m for the year, with everything else held constant.
Task: Starting from Atlas Manufacturing's baseline figures below, compute the new EBIT, new Net Income, new CFO, and new PP&E, net after a $10.0m increase in D&A — and confirm the balance sheet still balances.
Baseline figures from Cases 1–3, plus the scenario change:
| Line Item | Amount |
|---|---|
| Baseline EBIT (Case 1) | $80.0m |
| Interest Expense (Case 1) | $10.0m |
| Tax Rate | 25% (0.25) |
| Baseline Net Income (Case 1) | $52.5m |
| Baseline D&A (Case 3) | $30.0m |
| Increase in Accounts Receivable (Case 3) | $15.0m |
| Increase in Inventory (Case 3) | $10.0m |
| Increase in Accounts Payable (Case 3) | $8.0m |
| Baseline CFO (Case 3) | $65.5m |
| Baseline PP&E, net (Case 2) | $220.0m |
| Increase in D&A (scenario) | $10.0m |
The extra D&A flows through operating expenses, reducing EBIT dollar-for-dollar.
New EBIT = Baseline EBIT − Increase in D&A
Using this formula, compute the new EBIT.
From the new EBIT, subtract Interest Expense (unchanged) and apply the tax rate, just like in Case 1.
New Net Income = (New EBIT − Interest Expense) × (1 − Tax Rate)
Using this formula, compute the new Net Income.
D&A is a non-cash add-back, so the higher D&A partially offsets the lower Net Income in the cash flow statement — using the same CFO formula from Case 3.
New CFO = New Net Income + (Baseline D&A + Increase in D&A) − Increase in Accounts Receivable − Increase in Inventory + Increase in Accounts Payable
Using this formula, compute the new CFO.
The extra depreciation also reduces the net book value of PP&E on the balance sheet.
New PP&E, net = Baseline PP&E, net − Increase in D&A
Using this formula, compute the new PP&E, net.
Cash rises by the change in CFO; PP&E falls by the increase in D&A; Retained Earnings falls by the change in Net Income. Liabilities are unaffected.
Δ Assets = Δ Cash + Δ PP&E
Δ Equity = Δ Retained Earnings (Liabilities unchanged)
Using these formulas, confirm that Δ Assets = Δ Liabilities + Δ Equity — i.e., that the balance sheet still balances after all three statements update.
Try answering out loud first — then reveal the model answer and compare.