Explain the three hard linkages between the three financial statements.

What the interviewer is actually testing

Linkage questions ("if X changes, walk me through the effect on all three statements") are the single most common technical exercise in IB interviews because they test, in one question, whether a candidate actually understands accrual accounting as a system rather than three memorized templates. Interviewers are listening for:

1. You identify the FIRST statement affected, correctly. Many transactions originate on the income statement (a sale, an expense); some originate directly on the balance sheet/cash flow statement (a loan draw, a share buyback, paying down an existing payable) with zero income-statement effect. Candidates who reflexively start every answer on the income statement, even for pure financing transactions, reveal they're pattern-matching rather than reasoning.

2. You get the tax effects right, every time. Nearly every IS-originating change (depreciation, an expense, a write-down) has a knock-on tax effect that a weak candidate forgets, especially on the cash flow statement. If the question involves a change to a pre-tax line, an elite interviewer expects the after-tax net income impact and the corresponding tax cash effect, not just the pre-tax delta.

3. You finish by proving the balance sheet balances. The best answers explicitly state, at the end: "cash [up/down] by $X, [asset/liability] moved by $Y, and equity via retained earnings moved by $Z: assets and liabilities-plus-equity both changed by the same amount, so it balances." This closing check is the single strongest signal of mastery an interviewer can hear, because it's the exact discipline a real analyst uses to catch modeling errors.

The classic escalation is the depreciation walkthrough (its own lesson next), but the same skeleton applies to any prompt: a write-down, an acquisition, a debt issuance, a change in a working-capital assumption. Practice narrating out loud, in order: IS effect (if any), then tax effect (if any), then CFS effect, then BS effect, and always close with the balance check. Interviewers will keep pushing ("now what if it's paid in cash instead of accrued") precisely to see whether your mental model survives a twist, or whether you were reciting a memorized script for one specific scenario.

Common traps

Trap 1: Assuming every transaction starts on the income statement. Candidates try to force an IS entry for pure financing or cash-settlement transactions (paying down existing AP, drawing a loan, buying back stock) that have no revenue or expense component at all.

Say it out loud: "Not every transaction touches the income statement: a loan draw or paying down an existing payable is a pure balance sheet and cash flow event, since no new revenue or expense is being recognized."

Trap 2: Forgetting the tax effect on IS-originating changes. When asked "depreciation increases by $10, walk me through it," candidates often flow the full $10 through to cash and retained earnings without accounting for the fact that only the after-tax net income impact hits retained earnings, while the tax shield itself is a separate, real cash benefit.

Say it out loud: "Since depreciation is tax-deductible, a $10 increase reduces pre-tax income by $10, but net income only falls by $10 times one minus the tax rate: the tax savings on that $10 is real cash the company keeps."

Trap 3: Not distinguishing a P&L-neutral reclassification from a real economic transaction. Some balance sheet moves (reclassifying current portion of long-term debt, or converting AR into a note receivable) shuffle line items with zero cash or income effect. Candidates sometimes invent an income or cash impact for these out of habit.

Say it out loud: "This is a pure reclassification between two balance sheet accounts: no cash moves, no revenue or expense is recognized, so the income statement and cash flow statement are both untouched."

Trap 4: Skipping the final balance check. Candidates trace an effect through the IS and CFS correctly, then never confirm the balance sheet actually balances at the end, leaving the interviewer unsure whether the candidate would catch their own error in a live model.

Say it out loud: "Let me confirm this balances: assets changed by $X and liabilities plus equity changed by the same $X, so the equation still holds."

Trap 5: Treating a change in an accrual estimate as a cash event. A change in a reserve or an accrual (e.g., increasing a bad debt allowance, or an accrued liability estimate) is a non-cash income statement charge that lands in a contra-asset or liability account. Candidates sometimes wrongly flow it through cash immediately.

Say it out loud: "Increasing an accrual or a reserve is a non-cash charge to the income statement: it reduces net income and increases a liability or reduces a contra-asset, but it doesn't touch cash until the reserve is actually used or the liability is actually paid."

Trap 6: Losing track of which direction cash moves when a liability is paid down versus accrued. Candidates get the AP/accrued-expense mechanics right for increases but flip the sign when tracing a decrease (e.g., paying off existing payables).

Say it out loud: "Paying down an existing payable is a decrease in a current liability, which is a use of cash: the opposite of what happens when the liability first increases."