Three-Statement Modeling Interview Questions

Free sample from the Deskcraft question bank

If you can't link the three statements and flow a change through them, the interview ends early. These are the exact linkage questions the Deskcraft bank drills, from the classic depreciation walk-through to deferred taxes.

1. Walk me through the three financial statements and how they connect.

Model answer

The income statement shows profitability over a period, ending in net income. The cash flow statement starts from net income, adds back non-cash items (D&A, SBC), adjusts for changes in working capital, then shows investing and financing flows to reach the change in cash. The balance sheet is a point-in-time snapshot: net income flows into retained earnings, the ending cash from the CFS becomes cash on the BS, and PP&E links via capex and depreciation. Assets = liabilities + equity must always hold.

2. What are the three financial statements and what does each show?

Model answer

The income statement shows profitability over a period (revenue down to net income). The balance sheet shows financial position at a point in time (assets = liabilities + equity). The cash flow statement shows actual cash movement over a period across operating, investing and financing, reconciling net income to the change in cash. They link: net income flows to the CFS and to retained earnings, and ending cash on the CFS is the cash line on the BS.

3. A company is profitable but keeps running out of cash. How is that possible?

Model answer

Profit is accrual-based; cash is not. Common causes: heavy working-capital build (receivables and inventory growing with sales — revenue booked, cash not collected), large capex (hits cash, only depreciation hits the IS), debt principal repayments (not on the IS), or growth outpacing financing. Classic in fast-growing businesses: each new order consumes cash today for profit recognized later.

4. A company writes down inventory by 20 at a 40% tax rate. Walk me through the three statements.

Model answer

IS: the 20 write-down cuts pre-tax income by 20, taxes by 8, so net income falls 12. CFS: net income is down 12 but you add back the 20 non-cash write-down, so cash rises 8. BS: cash +8, inventory -20 gives assets -12, matched by retained earnings -12, so it balances. Net cash rises by the tax shield of 8.