It is great to connect with you! To help me tailor our session perfectly for this Investment Analysis Internship role, could you share a bit about your current background in finance or financial modeling, and let me know when your interview is coming up?

It's great to know you already have some modeling exposure under your belt. Let's make sure you're fully prepared to stand out in those competitive internship loops.

Given that background, testing your real-world readiness on the three financial statements is the perfect place to start. In investment banking and buy-side interviews, firms love to see if you can think like an analyst by asking how a single financial change ripples through a company's entire model.

Let's kick things off with a classic, high-yield interview prompt. To tackle this, you'll need to trace a specific change through the Income Statement, the Cash Flow Statement, and the Balance Sheet.

Suppose a company's Depreciation expense increases by $10.

Assuming a 40% corporate tax rate, how does this change affect the company's Net Income on the Income Statement? (Don't worry about the other two statements just yet—we'll take this step by step!)

Not quite, but this is exactly why we walk through it! It is one of the most common traps in finance interviews.

Many people make this exact leap, thinking "$10 times 40% is $4, so Net Income must change by $4." But let's look at what Depreciation actually is. It is an expense.

Because depreciation is an expense, increasing it actually reduces our profit. Let's walk through the math on the Income Statement step-by-step:

1. Pre-Tax Income: Since Depreciation is an operating expense, our Pre-Tax Income goes down by $10.
2. Taxes: With a 40% tax rate, our tax expense drops. We save $4 on taxes ($10 * 40%). This is known as a "tax shield."
3. Net Income: We lost $10 in operating profit but saved $4 on taxes.

Combined, our Net Income drops by $6 (-$10 + $4).

Does this step-by-step calculation make sense? If you are comfortable with this decrease of $6, we can move right to step two: tracking how this Net Income change flows into the Cash Flow Statement.

Perfect, let's roll right into step two: the Cash Flow Statement (CFS). This is where we bridge the gap between accounting profits and actual cold, hard cash.

Step 2: Tracking Cash Flow

When you look at the Cash Flow Statement, everything starts with that new Net Income we just calculated.

Remember, our Net Income dropped by $6. We carry this $6 decrease directly to the very top line of the Cash Flow from Operations section.

Now, we have to make an adjustment. Depreciation is a non-cash expense. Even though it lowered our Net Income on paper, the company didn't actually write a physical check or hand over any cash for it.

To adjust for this, we add back the full $10 of Depreciation under Cash Flow from Operations. Let's look at how that impacts our net cash position:

By saving $4 on our taxes, we actually ended up with $4 more cash in our pocket at the end of the day, even though our paper Net Income dropped. This $4 net increase in cash flows down to the bottom of the Cash Flow Statement, representing our final change in cash.