Accounting interview questions

Income statement: profitability over a period (revenue down to net income). Balance sheet: a snapshot of assets, liabilities and equity at a point in time. Cash flow statement: actual cash moving in/out over a period, split into operating, investing and financing.

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.

Net income from the income statement flows to the top of the cash flow statement and into retained earnings (equity) on the balance sheet. The cash flow statement's ending cash becomes the cash line on the balance sheet. Non-cash items and working-capital changes on the CFS reconcile accrual net income to actual cash.

Profit is accrual-based and ignores timing of cash. Cash can be trapped in growing receivables or inventory (working capital), drained by heavy capex, or consumed by debt repayments and interest - none of which fully show up in net income. Liquidity, not profitability, determines survival.

Cash accounting records revenue and expenses when cash actually changes hands. Accrual accounting records revenue when it's earned and expenses when incurred, regardless of cash timing (via receivables, payables, deferred revenue, etc.). GAAP/IFRS use accrual.