Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
Accounting
6 conceptsDepreciation through the three statements
Depreciation is a non-cash expense. It reduces pre-tax income, so it reduces taxes actually paid. Net income falls by D×(1−t), but the full D is added back on the cash flow statement, so cash RISES by D×t — the tax shield. Assets fall by D×(1−t) net, and equity falls by the same, so the balance sheet still balances.
Working capital changes and cash flow
Working capital is cash tied up in running the business. Money owed to you (receivables) and goods sitting on shelves (inventory) are cash you have spent but not collected — so when they grow, cash falls. Money you owe suppliers (payables) is the opposite: stretching it is a free loan. Cash flow moves in the exact opposite direction to net working capital, one for one.
Inventory write-down and asset impairment
A write-down or impairment is a non-cash charge: the asset is marked down on the balance sheet and the same amount runs through the income statement as an expense. Whether cash moves at all depends on tax. An inventory write-down is generally deductible, so cash taxes fall and cash actually RISES by the tax shield. A goodwill impairment is usually not deductible, so net income falls by the full charge and cash does not move. Either way the balance sheet balances: the asset falls, cash rises by the shield (if any), and equity falls by the after-tax charge.
Deferred revenue and recognition timing
Cash and revenue arrive at different times. When a customer pays upfront, the company has the cash but has not yet earned it, so it books a liability — deferred revenue — for the service it still owes. Revenue is then recognized evenly as the service is delivered, and the liability unwinds by the same amount. Net income follows revenue, not cash; the only later cash movement is the tax paid on the income as it is recognized.
Capitalize versus expense
Expensing puts the whole cost through the income statement now. Capitalizing parks it on the balance sheet and releases it as depreciation over its useful life. The cash spent is identical; what changes is timing. Capitalizing flatters year-one EBITDA and net income and shows the outlay in investing rather than operating cash flow. Its one real cost is tax: a smaller deduction now means a smaller tax shield now, so year-one cash is lower. Over the full life, total net income and total cash are the same either way.
Deferred tax assets and the valuation allowance
A net operating loss is worth something: it can offset future taxable income. The balance sheet records that worth as a deferred tax asset equal to the loss times the tax rate. When the company later makes money it pays less cash tax than its income statement shows, and the DTA unwinds by the difference. If it may never earn enough to use the loss, it books a valuation allowance — a non-cash charge through tax expense that writes the asset down. And because the asset is loss × rate, a cut in the tax rate shrinks it, which also hits earnings with no cash effect.