Walk depreciation.
Then change the numbers.

I would say the answer out loud before checking it. Change the expense and tax rate below. Watch net income flow into cash and retained earnings.

This is one isolated increase in depreciation, not a full financial model. Every number is a change versus the base case, in the same units you enter.

Set up the walk

Extra depreciation: 10 · Tax rate: 40%

01 · Income statement

Net income falls

EBIT / pretax income: -10.00
Tax expense: -4.00
Net income: -6.00

02 · Cash flow statement

Add back the noncash expense

Net income: -6.00
Depreciation add-back: +10.00
CFO / cash change: +4.00

Investing and financing cash flow: 0.

03 · Balance sheet

Assets and equity match

Cash: +4.00
Net PP&E: -10.00
Total assets: -6.00
Liabilities: 0.00
Retained earnings / equity: -6.00

Balanced: assets -6.00 = liabilities 0.00 + equity -6.00.

Pretax income falls by 10.00. Taxes fall by 4.00, so net income falls by 6.00. Add back 10.00 of noncash depreciation: CFO and cash rise by 4.00. Cash rises by 4.00 while net PP&E falls by 10.00. Assets and retained earnings both fall by 6.00.

Why cash rises

The asset was paid for earlier. Depreciation is a noncash expense in this walk. The cash benefit comes from the lower tax payment, not from depreciation itself.

Cash change = extra depreciation × tax rate. Net income change = -extra depreciation × (1 - tax rate).

When this shortcut stops working

If tax depreciation differs from book depreciation, or the company cannot use the deduction now, do not assume the same cash benefit. Check current and deferred taxes separately. This tool does not model those cases.

Display values round to two decimals, so adding rounded line items can differ by 0.01. The balance check uses the unrounded inputs. This is interview practice, not accounting or tax advice. Inputs stay in this page. No signup or upload.

Formula reference: Wall Street Prep: depreciation tax shield.

Walk depreciation.Then change the numbers.