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  1. 014A company's interest expense is Rs 100 crore: Rs 50 crore is paid in cash and Rs 50 crore is paid in kind, added to the loan instead. The tax rate is 40%. Walk the effect through the income statement, the cash flow statement and the balance sheet.Accounting flow riddlesCoreMizuhoNew York · 2026

    Try it first

    What happens to the company's cash balance?

    Show the worked solution

    Net income falls Rs 60 crore, cash falls Rs 10 crore and debt rises Rs 50 crore. All Rs 100 crore of interest is an expense, so pre-tax profit drops 100 and tax drops 40. On the cash flow statement, add back the Rs 50 crore paid in kind because no cash left, so cash from operations falls 10. On the balance sheet, cash is down 10, debt up 50 and retained earnings down 60: both sides fall 10.

    What does paid in kind actually mean?

    Think of a credit card bill where you pay half the interest and the bank adds the other half to what you owe. You have still been charged the full interest; you just have not paid all of it in cash. PIK interestPaid-in-kind interest: interest that is settled by adding it to the loan principal instead of paying cash, so the debt grows each period. is a real expense that is settled by growing the loan instead of draining the bank account. That single sentence tells you where each half goes: the expense hits profit in full, and the PIK half turns up as more debt.

    How does it move through each statement?

    Income statement: interest of Rs 100 crore cuts pre-tax profit by 100. Assuming all of it is deductible, tax falls by Rs 40 crore, so net income falls Rs 60 crore. Cash flow statement: start from net income, down 60, and add back the Rs 50 crore of PIK as a non-cash charge. Cash from operations falls by only Rs 10 crore, because the tax saving on the whole Rs 100 crore nearly covers the Rs 50 crore of cash interest. Balance sheet: cash down 10 on the assets side; debt up 50 and retained earnings down 60 on the other side. Both sides fall by 10.

    PIK interest hits profit in full; only the cash half leaves the bankIncome statementCash interest-50PIK interest-50Pre-tax profit-100Tax at 40%+40Net income-60Cash flow statementNet income-60Add back PIK (non-cash)+50Cash from operations-10Change in cash-10Balance sheetCash-10Total assets-10Debt (PIK added)+50Retained earnings-60Liabilities + equity-10Assets -10 = liabilities +50 plus equity -60. All figures Rs crore.
    Interest of Rs 100 crore cuts net income by Rs 60 crore after a Rs 40 crore tax saving. Adding back the Rs 50 crore of PIK leaves cash down only Rs 10 crore, while debt rises by Rs 50 crore and retained earnings fall Rs 60 crore, so the balance sheet still balances.
    The relationship
    ΔCash=−50+0.40×100=−10ΔDebt+ΔEquity=+50−60=−10\Delta\text{Cash} = -50 + 0.40 \times 100 = -10 \qquad \Delta\text{Debt} + \Delta\text{Equity} = +50 - 60 = -10
    -50cash interest paid, Rs crore
    0.40 x 100tax saved on all the interest
    +50PIK interest added to the loan
    -60fall in net income, carried to retained earnings
    What it says in wordsCash falls by the cash interest less the tax saved on all the interest, and the balance sheet balances because debt rises by the PIK.

    What should you add after the walk-through?

    Two points earn credit. First, the tax assumption: some tax systems limit how much interest a company can deduct, and the rules on PIK can differ, so say you have assumed full deductibility and would confirm the current rule. If the PIK half were not deductible, net income would fall Rs 80 crore and cash Rs 30 crore. Second, PIK compounds: next year's interest is charged on a loan Rs 50 crore larger, which is why lenders price it higher and why it shows up in leveraged buyouts where cash is tight early on.

    Where candidates lose it

    The common slip is treating PIK interest as if it were not an expense, so net income only falls on the cash half. The expense is the full Rs 100 crore; only the payment is split.

    The second slip is forgetting the tax saving on the PIK half, which gives cash down 30 or 50 instead of 10. Walk the income statement first, line by line, and the cash number follows.

    What the interviewer asks next

    • What changes in year 2 if the PIK rate stays the same?
    • Why would a borrower accept PIK interest at a higher rate than cash interest?
    • How would a lender reading the cash flow statement spot growing PIK interest?

    Asked at Mizuho, Generalist, New York, 2026 (Wall Street Oasis): Valuation: walk through 100 interest expense, 50 cash interest, 50 pik interest, 40 tax rate