These questions, word for word, filter analyst candidates at banks and funds. Practice saying the answers aloud and in order, statement by statement, ending with the balance proof.
How do you walk through $10 of depreciation?
Classic 1: "Walk me through $10 of depreciation. Tax rate 30%." "On the income statement, depreciation of $10 reduces pre-tax income by $10; at a 30% tax rate, taxes fall $3, so net income falls $7. On the cash flow statement, net income is down $7, but depreciation is non-cash, so I add back the full $10: operating cash flow is up $3, and total cash is up $3. On the balance sheet, cash is up $3 and net PP&E is down $10, so total assets are down $7; on the other side, retained earnings is down $7 through net income. Both sides are down $7. It balances. Intuition: the only cash effect of depreciation is the tax shield, $10 × 30% = $3."
Classic 2 (the follow-up): "Why does cash go UP when an expense went up?" Because the expense was never cash this year. Cash left when the asset was bought. But it is tax-deductible, so it cuts this year's cash tax bill. More non-cash expense means lower cash taxes, and that means more cash. If that still feels like alchemy, run Classic 3.
Classic 3: "Same $10 of depreciation, but the tax rate is 0%." IS: NI −10. CFS: −10 + 10 = CFO 0 → cash unchanged. BS: PP&E −10, RE −10. Balances. With no tax shield, depreciation has zero cash effect. That proves the add-back never "created" cash in the first place.
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How do receivables and a machine purchase flow through?
Classic 4: "Accounts receivable increases by $10, walk me through." (Two framings: clarify which!) Framing A (the usual intent: the sale already happened, collection is pending): IS: no new effect. CFS: CFO −10. BS: AR +10, cash −10, assets net 0, equity unchanged. Balances. Framing B (a fresh $10 credit sale, 30% tax): IS: revenue +10 → NI +7. CFS: +7 − 10 = CFO −3 → cash −3 (taxes paid in cash). BS: AR +10, cash −3 → +7; RE +7. Balances. Asking "do you mean the balance rose, or a new credit sale occurred?" is itself a strong signal. It shows you know revenue recognition and cash collection are separate events.
Classic 5: "We buy a $100 machine (cash), 10-year straight line, 30% tax. Walk through Year 0 and Year 1." Year 0 (purchase day): IS: nothing. CFS: CFI −100 → cash −100. BS: PP&E +100, cash −100 → assets net 0. Balances. Year 1: depreciation of $10, which is Classic 1 again: NI −7, CFO +3, PP&E −10, RE −7. Balances. Cumulative cash after year 1 is −97. Over the machine's full life the cumulative cash effect is −100 + 10×3 = −70. That's the machine's cost minus a decade of tax shields, and it's why DCF models in Phase 3 treat depreciation's tax shield as real value.
Which one statement would you pick to judge a business?
Classic 6: "If you could have only one statement to judge a business, which?" A strong conventional answer is the cash flow statement. Earnings are an opinion, cash is closer to fact, and survival is a cash phenomenon. The answer that signals the deepest mastery is two consecutive balance sheets. With the photographs you can reconstruct most of the videos. Their deltas hand you the working-capital story, the capex ≈ ΔPP&E + D&A, the financing flows, and the earnings retained. Either answer passes if you argue it with linkage logic. A memorized answer without the "because" doesn't.