Inventory Write-Down of $10: How to Walk Through All 3 Statements

"Walk me through a $10 inventory write-down" is one of the most common accounting questions in investment banking interviews. It's short, but it tests whether you understand non-cash charges, taxes, and how the three statements link together.

Here's the answer up front, assuming a 25% tax rate and that the write-down is tax deductible:

• Income statement: Net income falls by $7.50
• Cash flow statement: Cash rises by $2.50
• Balance sheet: Assets fall by $7.50, equity falls by $7.50, and it balances

Now let's break down why, so you can explain it confidently in 30 seconds and handle the follow-ups.

What Is an Inventory Write-Down?

An inventory write-down happens when inventory on the balance sheet is worth less than what the company paid for it. Think of obsolete electronics, damaged goods, or fashion items that went out of style.

Accounting rules require inventory to be carried at the lower of cost and net realizable value (or lower of cost or market, depending on the inventory method). When value drops below cost, the company reduces the inventory balance and records the loss as an expense.

The key point: no cash leaves the building. The company already paid for that inventory in the past. The write-down just admits it's worth less now.

Step 1: The Income Statement

The write-down is recorded as an expense, usually inside cost of goods sold or as a separate line item.

Here's the math:

Pre-tax income drops by $10. Because the expense is deductible, the company pays $2.50 less in taxes. So net income only falls by $7.50.

Quick tip

Always state your tax rate assumption out loud. Interviewers don't care whether you pick 25%, 30%, or 40%. They care that you remember taxes exist.

Step 2: The Cash Flow Statement

Start at the top with net income, which is down $7.50.

Next, add back the $10 write-down because it was a non-cash expense. It reduced net income on paper, but no cash actually went out.

Cash goes up by $2.50. That's the tax savings. The write-down itself is non-cash, but the lower tax bill is very real cash.

Where exactly does the $10 show up?

Some companies list the write-down as its own non-cash adjustment. Others let it flow through the change in inventory line in working capital, since the inventory balance dropped by $10.

Either way, the result is the same: +$10 in operating cash flow. Just don't count it twice.

Step 3: The Balance Sheet

Now tie it together.

Assets:

• Cash: +$2.50 (from the cash flow statement)
• Inventory: -$10.00 (the write-down itself)
• Total assets: -$7.50

Liabilities and equity:

• Retained earnings: -$7.50 (net income flows in)
• Total equity: -$7.50

Both sides fall by $7.50. The balance sheet balances. That's your signal that you got it right.

The 30-Second Interview Answer

Here's how you'd say it in the room:

"On the income statement, the $10 write-down is an expense, so pre-tax income falls by $10. At a 25% tax rate, net income falls by $7.50.

On the cash flow statement, net income is down $7.50, but I add back the $10 because it's non-cash, so cash from operations and cash overall are up $2.50.

On the balance sheet, cash is up $2.50 and inventory is down $10, so assets are down $7.50. On the other side, retained earnings are down $7.50 from net income, so it balances."

Short, structured, done. Interviewers love it when you go IS, then CFS, then BS in that order every time.

Same Question, Different Tax Rate

If you'd rather use a different rate, the logic doesn't change. Only the numbers do.

Notice the pattern: cash always rises by the tax savings ($10 × tax rate), and net income always falls by $10 × (1 - tax rate).

Follow-Up Questions You Should Expect

Good interviewers rarely stop at the base case. Here are the curveballs worth preparing.

"What if the write-down isn't tax deductible?"

This is the advanced version. Sometimes a write-down is recognized for book purposes but can't be deducted for tax until the inventory is actually sold or disposed of. In that case, a deferred tax asset shows up.

• Income statement: Pre-tax income -$10, book tax expense -$2.50 (a deferred tax benefit), net income -$7.50. Same as before.
• Cash flow statement: Net income -$7.50, add back $10, then subtract $2.50 for the increase in the deferred tax asset (the tax benefit is non-cash). Cash change: $0.
• Balance sheet: Inventory -$10, deferred tax asset +$2.50, so assets fall by $7.50. Retained earnings fall by $7.50. Balanced.

The intuition: you didn't actually save any cash taxes yet, so cash can't go up. Instead, you get a future tax benefit sitting on the balance sheet.

"How is this similar to depreciation?"

It's nearly identical in mechanics. Both are non-cash expenses that reduce taxes. Both lower net income, get added back on the cash flow statement, and increase cash by the tax savings.

The difference is on the balance sheet: depreciation reduces PP&E, while a write-down reduces inventory.

"Can the write-down be reversed later?"

It depends on the accounting standard:

• US GAAP: Inventory write-downs generally cannot be reversed, even if prices recover.
• IFRS: Reversals are allowed, but only up to the amount of the original write-down.

You probably won't get this question in a first round, but mentioning it shows depth.

"How does this affect EBITDA?"

If the write-down sits in COGS, reported EBITDA falls by $10, since it's an operating expense and not depreciation or amortization.

In practice, bankers often treat large write-downs as non-recurring and add them back to calculate adjusted EBITDA. That's why you'll see "inventory write-down" as an adjustment in plenty of pitch books and CIMs.

Common Mistakes to Avoid

• Forgetting taxes. Saying net income drops by $10 is the most frequent slip.
• Saying cash goes down. The write-down is non-cash. Cash actually goes up (unless the deferred tax scenario applies).
• Double counting on the CFS. Add back the $10 once, either as a non-cash charge or through the inventory line, not both.
• Not checking that it balances. Always finish with "assets down $7.50, equity down $7.50, so it balances." It shows you know the statements are linked.

The Bottom Line

The inventory write-down question is really a test of one idea: non-cash expenses hurt net income but help cash through tax savings. Once you've got that, the three statements fall into place.

Practice saying the answer out loud a few times until it feels natural. Then run the same drill on depreciation, goodwill impairment, and asset write-downs. They all follow the same playbook, and mastering one means you're ready for all of them.