Oct 08, 2026 by Offer

How does depreciation affect the three statements (How To Answer): Interview Answer Guide 2027

To answer this depreciation interview question, walk $10 of depreciation through each statement in order — income, cash flow, balance sheet — stating the dollar effect at each step with the tax shield explicit. Assume a 30% tax rate up front, and close with the balance check: assets and equity both move −$7, so the equation holds.

What This Depreciation Interview Question Tests

Depreciation is the accounting allocation of a past capital expenditure over an asset's useful life — a non-cash charge that reduces reported profit without spending cash today. Interviewers use it as the standard probe of three-statement fluency because the correct answer requires holding the income statement, cash flow statement, and balance sheet in your head simultaneously.

How to Answer This Depreciation Interview Question

Announce your tax assumption up front — “assuming a 30% tax rate” — then walk the statements in fixed order. Income statement: EBIT down $10, tax down $3, net income down $7. Cash flow statement: net income down $7, add back $10 of D&A, operating cash flow up $3. Balance sheet: PP&E down $10, cash up $3, retained earnings down $7.

The details that earn marks: naming the $3 explicitly as a tax shield, emphasizing that depreciation is non-cash (which is why cash rises), and closing with the balance check. Deliver it slowly and in order — rushing the walk-through is how candidates drop the tax shield or flip a sign.

Common Mistakes on the Depreciation Interview Question

Forgetting the tax shield. Saying net income falls the full $10 ignores that depreciation is tax-deductible. The $3 tax saving is the most commonly dropped piece.

Saying cash decreases. Depreciation involves no cash outflow — after the add-back, operating cash flow rises by the tax shield. Claiming cash falls reveals the candidate is reciting, not reasoning.

Breaking the balance sheet. If your PP&E, cash, and retained earnings movements don't net to equal changes on both sides, something is wrong — always run the balance check before finishing.

This is the kind of technical question that commonly decides interview rounds — candidates report that one hesitant or rambling answer here can end the process on the spot. Practice saying your answer out loud until it sounds calm, structured, and confident.

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FAQ

Why is depreciation added back on the cash flow statement?

Because it reduced net income without consuming cash. The indirect cash flow method starts from net income, so every non-cash charge must be reversed to arrive at actual cash generated.

Does depreciation affect valuation?

Indirectly: it lowers taxable income, creating a tax shield that raises free cash flow, which is what a DCF values. The depreciation number itself is added back, so only the tax effect flows through.

What is the difference between depreciation and amortization?

Depreciation applies to tangible assets like machinery; amortization applies to intangible assets like patents. Economically thEY work the same way — non-cash allocation of past spend over useful life.

Can depreciation ever be a cash outflow?

The charge itself never is — the cash left when the asset was purchased. That is exactly why the original capex appears in investing cash flow in the purchase year, not spread across periods. Interview format may vary by role and region — check the official careers page for the current process.

Preparing for EY's interview? Our 2027 EY Online Assessment and Video Interview Tutorials has practice questions and answers — $79 one-time, instant download.