Walk me through the three financial statements and, in one sentence each, how they connect.
Mock Interview & FitInterview question
General educational practice only. This is not an actual, confidential, leaked, or firm-provided interview question. Check important technical details against primary learning materials.
The answer
- The income statement shows a company's revenues, expenses, and net income over a period. Net income is the profit left after subtracting all operating costs, depreciation, interest, and taxes.
- The cash flow statement starts with that net income, adds back non-cash charges like depreciation, adjusts for changes in working capital, and groups cash flows into operating, investing, and financing activities. It ends with the net change in cash for the period.
- The balance sheet is a point-in-time snapshot where assets always equal liabilities plus shareholders' equity. It includes every resource the company controls and every claim against those resources.
- The two spine connections: Net income from the income statement becomes the first line of the cash flow statement and also adds to retained earnings inside shareholders' equity on the balance sheet. The ending cash balance from the cash flow statement directly becomes the cash line on the balance sheet.
Income statement
| Revenue | 1,000 |
| COGS | (600) |
| Gross profit | 400 |
| SG&A | (180) |
| EBITDA | 220 |
| D&A | (40) |
| EBIT | 180 |
| Interest expense | (20) |
| Pre-tax income | 160 |
| Taxes | (40) |
| Net income | 120 |
Illustrative figures
Also asked as
- Why do we subtract cash in the enterprise value bridge? Give both halves of the standard answer.
- A company collects $120 of cash on December 30 for a service it will deliver next year. Walk through all three statements at year-end, assuming a 25% tax rate for book purposes and cash taxation matching book.
- Why is EV/EBITDA usable across companies with different capital structures while P/E is not? When would EV/EBITDA itself break down as a comparison tool?
- Your DCF's terminal value is 85% of total enterprise value. Your MD asks whether that's a problem. What do you say, and what two cross-checks do you run?
- Accounts receivable increases by $50 during the year. Walk through the impact on the three statements at a 40% tax rate, and explain why revenue recognition and cash collection diverge here.
- A company with equity value of $500M, debt of $200M, and cash of $900M: what is its enterprise value, how is that possible, and what would you check before calling it mispriced?
- In an acquisition, the buyer writes up the target's PP&E by $100M (10-year straight-line, stock deal, write-up not tax-deductible). Walk through year-one effects on the combined income statement, cash flow statement, and the deferred tax liability, at a 25% tax rate. Then state the net effect on unlevered FCF and on a DCF of the combined company.
- Company A trades at 14x EV/EBITDA, Company B at 7x. B has higher revenue growth. Give three distinct, non-overlapping explanations that could justify the gap, and describe the specific evidence you'd pull from the filings to test each one.
- A company announces a $300M debt-funded special dividend. Walk through what happens to equity value, enterprise value, EV/EBITDA, and cost of equity, and reconcile why shareholders aren't obviously better or worse off.
Practice this topic with rubric-grounded grading inside IB Atlas.
Start freeGet all 125 practice prompts as one PDF.
General educational prompts with study explanations for offline review. They are not firm-provided or confidential questions.
Keep going
The rest of this topic
The three statements, linked
Walk me through the three financial statements: what does each one measure, and over what time frame?What is the difference between COGS and SG&A? Give two examples of costs that belong in each for a manufacturing company.Walk me through the balance sheet: what are the major sections and how are line items ordered within each?Walk me through the cash flow statement: what does each of the three sections capture, and what's the overall purpose of the statement?Explain the three hard linkages between the three financial statements.Stock-Based Compensation (SBC) on the Statements, ExplainedZero-Coupon Bonds and the Three Statements, ExplainedOriginal Issue Discount (OID) on Bonds, Explained