Question of the day
2026-10-01
Walk me through how a $10 increase in depreciation flows through the three statements (40% tax).
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
Income statement: pretax income falls $10, so net income falls $6. Cash flow statement: start with net income -$6, add back the $10 non-cash depreciation, so cash rises $4. Balance sheet: cash up $4, PP&E down $10 (net assets -$6); on the other side retained earnings down $6. It balances. Net effect: you saved $4 in cash via the tax shield.
⚠ Common wrong answer: "Net income falls by $10, and cash falls too because the expense went up." Why it fails: It forgets the tax shield and the non-cash nature of depreciation: net income falls only $6 at a 40% tax rate, and cash actually RISES $4 because no cash left the business while the tax bill shrank.
Want 10 of these a day, scheduled so they stick?
A free account gets you Daily 10 — ten questions a day from the full 2,300+ bank, spaced-repetition scheduled. No credit card.
Tomorrow's question, in your inbox.
One real IB interview question every morning — free, one-click unsubscribe, nothing else ever.