M&I GUIDES (TECHNICALS) EXAM
QUESTIONS AND ANSWERS GRADED A+
2026
Walk me through the 3 financial statements. - ANS "The 3 major financial statements are the
Income Statement, Balance Sheet and Cash Flow Statement.
The Income Statement gives the company's revenue and expenses, and goes down to Net
Income, the final line on the statement.
The Balance Sheet shows the company's Assets - its resources - such as Cash, Inventory and
PP&E, as well as its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity.
Assets must equal Liabilities plus Shareholders' Equity.
The Cash Flow Statement begins with Net Income, adjusts for non-cash expenses and working
capital changes, and then lists cash flow from investing and financing activities; at the end, you
see the company's net change in cash."
How do the 3 statements link together? - ANS "To tie the statements together, Net Income
from the Income Statement flows into Shareholders' Equity on the Balance Sheet, and into the
top line of the Cash Flow Statement. Changes to Balance Sheet items appear as working capital
changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet
items such as PP&E, Debt and Shareholders' Equity. The Cash and Shareholders' Equity items on
the Balance Sheet act as "plugs," with Cash flowing in from the final line on the Cash Flow
Statement."
If I were stranded on a desert island, only had 1 statement and I wanted to review the overall
health of a company - which statement would I use and why? - ANS You would use the Cash
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
,Flow Statement because it gives a true picture of how much cash the company is actually
generating, independent of all the non-cash expenses you might have. And that's the #1 thing
you care about when analyzing the overall financial health of any business - its cash flow.
Let's say I could only look at 2 statements to assess a company's prospects - which 2 would I use
and why? - ANS You would pick the Income Statement and Balance Sheet, because you can
create the Cash Flow Statement from both of those (assuming, of course that you have "before"
and "after" versions of the Balance Sheet that correspond to the same period the Income
Statement is tracking).
**Walk me through how Depreciation going up by $10 would affect the statements. -
ANS Income Statement: Operating Income would decline by $10 and assuming a 40% tax
rate, Net Income would go down by $6.
Cash Flow Statement: The Net Income at the top goes down by $6, but the $10 Depreciation is a
non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $4.
There are no changes elsewhere, so the overall Net Change in Cash goes up by $4.
Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets side because of
the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement.
Overall, Assets is down by $6. Since Net Income fell by $6 as well, Shareholders' Equity on the
Liabilities & Shareholders' Equity side is down by $6 and both sides of the Balance Sheet
balance.
If Depreciation is a non-cash expense, why does it affect the cash balance? - ANS Although
Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense,
Depreciation affects cash by reducing the amount of taxes you pay.
What happens when Accrued Compensation goes up by $10? - ANS No changes to the
Income Statement.
On the Cash Flow Statement Accrued Compensation is a liability, so an increase adds to your
Cash Flow from Operations in the Changes in Working Capital category. Cash Flow from
Operations then goes up by $10, as does the Net Change in Cash at the bottom.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
,On the Balance Sheet, the Liabilities & Shareholders' Equity side would go up by $10 because
Accrued Compensation is a liability - and that would be balanced out by the Cash going up by
$10 on the Assets side.
What happens when Inventory goes up by $10, assuming you pay for it with cash - ANS No
changes to the Income Statement.
On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from
Operations - it goes down by $10, as does the Net Change in Cash at the bottom.
On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the
changes cancel out and Assets still equals Liabilities & Shareholders' Equity.
Why is the Income Statement not affected by changes in Inventory? - ANS This is a common
interview mistake - incorrectly stating that Working Capital changes show up on the Income
Statement.
In the case of Inventory, the expense is only recorded when the goods associated with it are
sold - so if it's just sitting in a warehouse, it does not count as a Cost of Good Sold or Operating
Expense until the company manufactures it into a product and sells it.
Let's say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements
affected at the start of "Year 1," before anything else happens? - ANS At the start of "Year 1,"
before anything else has happened, there would be no changes on Apple's Income Statement
(yet).
On the Cash Flow Statement, the additional investment in factories would show up under Cash
Flow from Investing as a net reduction in Cash Flow (so Cash Flow is down by $100 so far). And
the additional $100 worth of debt raised would show up as an addition to Cash Flow, canceling
out the investment activity. So the cash number stays the same.
On the Balance Sheet, there is now an additional $100 worth of factories in the Plants, Property
& Equipment line, so PP&E is up by $100 and Assets is therefore up by $100. On the other side,
debt is up by $100 as well and so both sides balance.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
, Now let's go out 1 year, to the start of Year 2. Assume the debt is high-yield so no principal is
paid off, and assume an interest rate of 10%. Also assume the factories depreciate at a rate of
10% per year. What happens? - ANS After a year has passed, Apple must pay interest expense
and must record the depreciation.
Operating Income would decrease by $10 due to the 10% depreciation charge each year, and
the $10 in additional Interest Expense would decrease the Pre-Tax Income by $20 altogether
($10 from the depreciation and $10 from Interest Expense).
Assuming a tax rate of 40%, Net Income would fall by $12.On the Cash Flow Statement, Net
Income at the top is down by $12. Depreciation is a non-cash expense, so you add it back and
the end result is that Cash Flow from Operations is down by $2.
That's the only change on the Cash Flow Statement, so overall Cash is down by $2.
On the Balance Sheet, under Assets, Cash is down by $2 and PP&E is down by $10 due to the
depreciation, so overall Assets are down by $12.
On the other side, since Net Income was down by $12, Shareholders' Equity is also down by $12
and both sides balance.
Remember, the debt number under Liabilities does not change since we've assumed some of
the debt is actually paid back. **Wouldn't paying back some of our debt decrease our
liabilities??
At the start of Year 3, the factories all break down and the value of the equipment is written
down to $0. The loan must also be paid back now. Walk me through the 3 statements. -
ANS After 2 years, the value of the factories is now $80 if we go with the 10% depreciation
per year assumption. It is this $80 that we will write down in the 3 statements.
First, on the Income Statement, the $80 write-down shows up in the Pre-Tax Income line. With a
40% tax rate, Net Income declines by $48.
On the Cash Flow Statement, Net Income is down by $48 but the write-down is a non- cash
expense, so we add it back - and therefore Cash Flow from Operations increases by $32.
There are no changes under Cash Flow from Investing, but under Cash Flow from Financing
there is a $100 charge for the loan payback - so Cash Flow from Investing falls by $100.
Overall, the Net Change in Cash falls by $68.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
4
QUESTIONS AND ANSWERS GRADED A+
2026
Walk me through the 3 financial statements. - ANS "The 3 major financial statements are the
Income Statement, Balance Sheet and Cash Flow Statement.
The Income Statement gives the company's revenue and expenses, and goes down to Net
Income, the final line on the statement.
The Balance Sheet shows the company's Assets - its resources - such as Cash, Inventory and
PP&E, as well as its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity.
Assets must equal Liabilities plus Shareholders' Equity.
The Cash Flow Statement begins with Net Income, adjusts for non-cash expenses and working
capital changes, and then lists cash flow from investing and financing activities; at the end, you
see the company's net change in cash."
How do the 3 statements link together? - ANS "To tie the statements together, Net Income
from the Income Statement flows into Shareholders' Equity on the Balance Sheet, and into the
top line of the Cash Flow Statement. Changes to Balance Sheet items appear as working capital
changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet
items such as PP&E, Debt and Shareholders' Equity. The Cash and Shareholders' Equity items on
the Balance Sheet act as "plugs," with Cash flowing in from the final line on the Cash Flow
Statement."
If I were stranded on a desert island, only had 1 statement and I wanted to review the overall
health of a company - which statement would I use and why? - ANS You would use the Cash
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
,Flow Statement because it gives a true picture of how much cash the company is actually
generating, independent of all the non-cash expenses you might have. And that's the #1 thing
you care about when analyzing the overall financial health of any business - its cash flow.
Let's say I could only look at 2 statements to assess a company's prospects - which 2 would I use
and why? - ANS You would pick the Income Statement and Balance Sheet, because you can
create the Cash Flow Statement from both of those (assuming, of course that you have "before"
and "after" versions of the Balance Sheet that correspond to the same period the Income
Statement is tracking).
**Walk me through how Depreciation going up by $10 would affect the statements. -
ANS Income Statement: Operating Income would decline by $10 and assuming a 40% tax
rate, Net Income would go down by $6.
Cash Flow Statement: The Net Income at the top goes down by $6, but the $10 Depreciation is a
non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $4.
There are no changes elsewhere, so the overall Net Change in Cash goes up by $4.
Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets side because of
the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement.
Overall, Assets is down by $6. Since Net Income fell by $6 as well, Shareholders' Equity on the
Liabilities & Shareholders' Equity side is down by $6 and both sides of the Balance Sheet
balance.
If Depreciation is a non-cash expense, why does it affect the cash balance? - ANS Although
Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense,
Depreciation affects cash by reducing the amount of taxes you pay.
What happens when Accrued Compensation goes up by $10? - ANS No changes to the
Income Statement.
On the Cash Flow Statement Accrued Compensation is a liability, so an increase adds to your
Cash Flow from Operations in the Changes in Working Capital category. Cash Flow from
Operations then goes up by $10, as does the Net Change in Cash at the bottom.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
,On the Balance Sheet, the Liabilities & Shareholders' Equity side would go up by $10 because
Accrued Compensation is a liability - and that would be balanced out by the Cash going up by
$10 on the Assets side.
What happens when Inventory goes up by $10, assuming you pay for it with cash - ANS No
changes to the Income Statement.
On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from
Operations - it goes down by $10, as does the Net Change in Cash at the bottom.
On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the
changes cancel out and Assets still equals Liabilities & Shareholders' Equity.
Why is the Income Statement not affected by changes in Inventory? - ANS This is a common
interview mistake - incorrectly stating that Working Capital changes show up on the Income
Statement.
In the case of Inventory, the expense is only recorded when the goods associated with it are
sold - so if it's just sitting in a warehouse, it does not count as a Cost of Good Sold or Operating
Expense until the company manufactures it into a product and sells it.
Let's say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements
affected at the start of "Year 1," before anything else happens? - ANS At the start of "Year 1,"
before anything else has happened, there would be no changes on Apple's Income Statement
(yet).
On the Cash Flow Statement, the additional investment in factories would show up under Cash
Flow from Investing as a net reduction in Cash Flow (so Cash Flow is down by $100 so far). And
the additional $100 worth of debt raised would show up as an addition to Cash Flow, canceling
out the investment activity. So the cash number stays the same.
On the Balance Sheet, there is now an additional $100 worth of factories in the Plants, Property
& Equipment line, so PP&E is up by $100 and Assets is therefore up by $100. On the other side,
debt is up by $100 as well and so both sides balance.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
, Now let's go out 1 year, to the start of Year 2. Assume the debt is high-yield so no principal is
paid off, and assume an interest rate of 10%. Also assume the factories depreciate at a rate of
10% per year. What happens? - ANS After a year has passed, Apple must pay interest expense
and must record the depreciation.
Operating Income would decrease by $10 due to the 10% depreciation charge each year, and
the $10 in additional Interest Expense would decrease the Pre-Tax Income by $20 altogether
($10 from the depreciation and $10 from Interest Expense).
Assuming a tax rate of 40%, Net Income would fall by $12.On the Cash Flow Statement, Net
Income at the top is down by $12. Depreciation is a non-cash expense, so you add it back and
the end result is that Cash Flow from Operations is down by $2.
That's the only change on the Cash Flow Statement, so overall Cash is down by $2.
On the Balance Sheet, under Assets, Cash is down by $2 and PP&E is down by $10 due to the
depreciation, so overall Assets are down by $12.
On the other side, since Net Income was down by $12, Shareholders' Equity is also down by $12
and both sides balance.
Remember, the debt number under Liabilities does not change since we've assumed some of
the debt is actually paid back. **Wouldn't paying back some of our debt decrease our
liabilities??
At the start of Year 3, the factories all break down and the value of the equipment is written
down to $0. The loan must also be paid back now. Walk me through the 3 statements. -
ANS After 2 years, the value of the factories is now $80 if we go with the 10% depreciation
per year assumption. It is this $80 that we will write down in the 3 statements.
First, on the Income Statement, the $80 write-down shows up in the Pre-Tax Income line. With a
40% tax rate, Net Income declines by $48.
On the Cash Flow Statement, Net Income is down by $48 but the write-down is a non- cash
expense, so we add it back - and therefore Cash Flow from Operations increases by $32.
There are no changes under Cash Flow from Investing, but under Cash Flow from Financing
there is a $100 charge for the loan payback - so Cash Flow from Investing falls by $100.
Overall, the Net Change in Cash falls by $68.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
4
