FinanceFluency
Accounting
Accounting

Walk-me-through scenarios

The classic single-step and multi-step accounting scenarios that come up in every IB interview, with complete statement-by-statement answers.

Why interviewers love walk-throughs

Walk-me-through questions are the backbone of every accounting interview. They test whether you actually understand the mechanics — you can't memorise your way through a multi-step scenario you've never seen before. But if you know the rules, you can handle any twist.

Here are the key principles to internalise before reading the scenarios below:

  1. Always state your assumptions — tax rate, whether something hits the IS, and whether it's cash or non-cash.
  2. Work in order: Income Statement → Cash Flow Statement → Balance Sheet.
  3. End with a balance check — confirm Assets = Liabilities + Equity. Interviewers notice if you forget this.

Single-step scenarios

Depreciation increases by $10

Assume a 40% tax rate.

Income Statement:

  • Depreciation ↑ $10 → Operating Income ↓ $10 → Pre-Tax Income ↓ $10
  • Tax savings: $10 × 40% = $4 less tax
  • Net Income ↓ $6

Cash Flow Statement:

  • Net Income ↓ $6
  • Add back Depreciation (non-cash): +$10
  • Net cash ↑ $4

Balance Sheet:

  • Cash ↑ $4
  • PP&E ↓ $10 (accumulated depreciation increases)
  • Total Assets ↓ $6
  • Retained Earnings ↓ $6 (from lower Net Income)
  • Assets = L + E? ✓ Both sides down $6.
The quick version

"Depreciation goes up by $10. It's non-cash, so Pre-Tax Income drops $10, we save $4 in taxes, and Net Income drops $6. On the CFS we add back $10 of depreciation, so cash is up $4 net. On the BS, cash is up $4 but PP&E is down $10, so total assets are down $6 — matched by Retained Earnings down $6. Balance Sheet balances."

Revenue increases by $100

Assume a 40% tax rate. Revenue is collected in cash immediately.

Income Statement:

  • Revenue ↑ $100 → Pre-Tax Income ↑ $100
  • Taxes ↑ $40
  • Net Income ↑ $60

Cash Flow Statement:

  • Net Income ↑ $60
  • No non-cash adjustments, no working capital changes (cash collected immediately)
  • Net cash ↑ $60

Balance Sheet:

  • Cash ↑ $60
  • Retained Earnings ↑ $60
  • Balances. ✓
What if revenue is NOT collected in cash?

If the customer hasn't paid yet, AR goes up by $100. On the CFS, Net Income is still up $60 but you subtract $100 for the AR increase. Cash is actually down $40. On the BS: AR ↑ $100, Cash ↓ $40, Retained Earnings ↑ $60. Assets up $60 = Equity up $60. ✓

The company issues $100 in debt

Income Statement: No change. Issuing debt is not tax-deductible and doesn't correspond to the current period.

Cash Flow Statement:

  • No CFO impact
  • Cash Flow from Financing: +$100 (debt raised)
  • Net cash ↑ $100

Balance Sheet:

  • Cash ↑ $100 (asset)
  • Debt ↑ $100 (liability)
  • Balances. ✓

The company spends $50 on Capital Expenditures

Income Statement: No change. CapEx is a long-term asset purchase — it's capitalised, not expensed.

Cash Flow Statement:

  • No CFO impact
  • Cash Flow from Investing: −$50
  • Net cash ↓ $50

Balance Sheet:

  • Cash ↓ $50
  • PP&E ↑ $50
  • Balances. ✓
CapEx never hits the IS directly

The expense flows through the IS over time as depreciation. This is a top-5 most-tested concept — don't get it wrong.

Stock-Based Compensation (SBC) increases by $10

Assume a 40% tax rate.

Income Statement:

  • SBC ↑ $10 (operating expense) → Pre-Tax Income ↓ $10
  • Tax savings: $4
  • Net Income ↓ $6

Cash Flow Statement:

  • Net Income ↓ $6
  • Add back SBC (non-cash): +$10
  • Net cash ↑ $4

Balance Sheet:

  • Cash ↑ $4
  • Common Stock & APIC ↑ $10 (new shares/options created)
  • Retained Earnings ↓ $6
  • Assets ↑ $4 = Equity ↑ $4 ($10 − $6). ✓

Multi-step scenarios

Buy inventory with debt, turn it into products, sell the products

Assume: borrow $100, purchase $100 of inventory, manufacture and sell products for $200 in revenue with $100 in COGS. Tax rate 40%.

Step 1: Issue $100 in debt and buy $100 of inventory

  • IS: No change
  • CFS: +$100 from financing (debt), −$100 for inventory purchase
  • BS: Debt ↑ $100, Inventory ↑ $100, Cash unchanged

Step 2: Manufacture and sell the products

  • IS: Revenue ↑ $200, COGS ↑ $100 → Pre-Tax Income ↑ $100. Tax ↑ $40. Net Income ↑ $60.
  • CFS: Net Income ↑ $60, Inventory ↓ $100 (source of cash). Cash ↑ $160? Not quite — Revenue may or may not have been collected. Assuming cash sale: Net cash ↑ $160.

Wait — let's be more precise. The inventory decrease of $100 is already reflected through COGS and Net Income. So on the CFS, the inventory change might net out. The clean way to think about it:

  • You received $200 in cash from the sale
  • You paid $40 in taxes
  • Net cash ↑ $160 from operations

Final Balance Sheet:

  • Cash ↑ $160
  • Inventory: back to where it started (used up)
  • Debt ↑ $100
  • Retained Earnings ↑ $60
  • Assets ↑ $160 = L + E ↑ $160 ($100 + $60). ✓
Multi-step framework

Break it into phases. Do each phase as its own walk-through, then stack the effects. Interviewers don't expect you to solve it in one mental leap — they want to see structured, step-by-step thinking.

The company acquires another company for $150 in cash. The target has $100 in assets and $50 in liabilities.

This is the classic Goodwill scenario. No stock, all cash.

Target's Shareholders' Equity = $100 − $50 = $50.

We're paying $150 for $50 of equity → Goodwill = $150 − $50 = $100.

Income Statement: No change at the time of acquisition (Goodwill is not amortised under US GAAP, though it can be impaired later).

Cash Flow Statement:

  • Cash Flow from Investing: −$150 (acquisition cost)
  • Net cash ↓ $150

Balance Sheet:

  • Cash ↓ $150
  • Target's Assets ↑ $100 (consolidated)
  • Goodwill ↑ $100
  • Target's Liabilities ↑ $50 (consolidated)
  • Assets: −$150 + $100 + $100 = +$50
  • L + E: +$50
  • Balances. ✓
Goodwill only changes on impairment

Under US GAAP, Goodwill is tested annually for impairment but is never amortised. Under IFRS, the treatment is similar. If Goodwill is impaired, it hits the IS as a non-cash charge — the same pattern as depreciation.

The advanced scenario: partial acquisition (70%)

If you acquire only 70% of a company for $70, and the target is worth $100 total ($60 in assets, $30 in liabilities, so $30 equity):

  • You paid $70 for 70% of $30 equity = $21 of book value
  • Goodwill = $70 − $21 = $49
  • Minority Interest = 30% × $30 = $9 (shows up as a liability on your BS)

You consolidate 100% of the target's assets and liabilities (because you control it), but add a Minority Interest line to reflect the 30% you don't own.

Balance Sheet:

  • Cash ↓ $70
  • Target Assets ↑ $60
  • Goodwill ↑ $49
  • Target Liabilities ↑ $30
  • Minority Interest ↑ $9 (liability)
  • Assets: −$70 + $60 + $49 = +$39
  • L + E: +$30 + $9 = +$39. ✓

This is advanced and not always asked at analyst level, but knowing it puts you ahead of nearly every other candidate.

How to practise

The best way to master these is to say them out loud until you can walk through each scenario in under 60 seconds without notes. The interviewer is watching for:

  1. Structure — IS → CFS → BS, every time
  2. Speed — Hesitation signals you're memorising, not understanding
  3. Balance check — Always end with "and the Balance Sheet balances because..."
  4. Handling twists — If they say "now what if there's also a $20 write-down?" you calmly add another layer

Go through the single-step scenarios first until they're automatic, then tackle the multi-step ones. If you can do the acquisition walk-through smoothly, you're in the top 5% of candidates.