Question about depreciation

Another classic question that I've gotten a few times is something like this:

"Imagine that you have a company and suddenly you find out that you reported your depreciation expense incorrectly. You now have an additional $10 million in depreciation. How would this change be reflected in all three financial statements?"

I've actually received some form of this question about six times as I've interviewed. As always, you want to keep things simple and just go through everything methodically. Here's how I might go about answering this:

"I'll start with the income statement. Your depreciation expense will increase by $10 million, which will decrease your operating income by $10 million. Assuming (to make life easier) that you have a 40% tax rate, then your net income will decrease by $6 million after accounting for the tax shield you get from added depreciation expense.

"This net income will flow onto the statement of cash flows, so the net income will be decreased by $6 million. But, you will add back the $10 mm in depreciation so your net change in operating cash flows will be a positive $4 million.

"On the balance sheet, your accumulated depreciation increases by $10mm, so your net PP&E will decrease by $10mm. The cash balance increases by $4 million (from the cash flow statement), so the asset side of the balance sheet nets to a negative $6mm. No cash is actually paid out, but in essence your tax shield increases by $4mm so your cash position increases. On the liability/equity side, your net income, which decreased by $6mm, flows into retained earnings and therefore balances with your assets."

One time at Lazard I was asked, "You have been depreciating your assets using a double-declining method, but you now change to a straight-line method. What does this do to the financial statements?"

This question is similar but there's just one more little caveat. Can you think of it?

I've got a pretty cool pdf file that shows how all of the financial statements are connected. I'll post it on here soon.