Accounting

Question 1

What are the 3 financial statements

Answer 1

IS / revenue and expenses. Net income as final line of the statement

BS assets, resources and liabilities. Golden rule being assets equals liabilities and S.H.E

CFS begins with NEt income and
adjusts for non cash expenses and working capital changes
lists CF from investment and financing activities
reports change in net cash position

Question 2

Depreciation is up by 10

Answer 2

IS

Depreciation is an expense

Operating income would decline by 10. Assuming a 40% tax rate, net income is down by 6.

CFS

Net income is down by 6

Depreciation is a non cash expenses that has to be added back for full amount, 10 (CF op)

Net cash up by 4

BS

PPE goes down by 10, cash is up by 4 and therefore assets is down by 6. To balance out S.H.E is down by 6

Question 3

Why does depreciation, a non cash expense, affect cash balance

Answer 3

It is tax deductible, and taxes are a cash expense. So Depreciation affects cash balance by reducing amount of taxes you must pay

Question 4

Accrued compensation up by 10

Answer 4

Accrued compensation is now being recognized as an expense

IS

Operating expenses is up by 10, PTI falls by 10 and NI falls by 6

CFS

NI falls by 6
Accrued compensation will increase OP CF by 10

Net cash is up by 4

BS

Cash up by 4
Accrued compensation liability is up by 10
Retained earnings down by 6 similar to NI

Question 5

Inventory up by 10 all cash

Answer 5

No change to income statement

CFS

Inventory is an asset therefore decreases CF from operations by 10

Net cash down by 10

BS

Cash by 10, Inv up by 10

Question 6

Why is IS not affected by changes in inventory

Answer 6

Expense is only recognized when the goods associated to it are sold, so if it is inventory sitting in a warehouse, it does not affect COGS

Question 7

Buy factory 100 CHF with debt Y1

Answer 7

CFS

Additional investment is a negative CF from investment

Debt is a positive cash flow from financing

Net cash is constant

BS

100 in PPE
Debt 100 CHF

Question 8

100 in factories bought with high yield debt, so no principal repayment. IR 10% and amortization 10%. Record after year 1.

Answer 8

We must record the depreciation and interest expense

IS

Operating income is reduced by 10 for depreciation and 10 for interest rate.

PTI down by 20, NI down by 12

CFS

NI down by 12

Depreciation is a non cash expense for which we must readjust by adding 10 into operational CF, net cash flow minus 2

BS

Cash is down by 2
PPE is down by 10

NI down by 12, so SHE down by 12 and all balance

NO DEBT PAID BACK

Question 9

Equipment write down and loan repayment

Answer 9

Write down is a non cash expense

First, determine residual value of equipment or factories based on amortization (2 years at 10%, 80% of original value remains)

IS

80 write down reduces by 80 PTI
NI reduced by 48

CFS

NI down by 48
Write down is a non cash expense so it must be added back to CF OP for 80 (32 positive CF OP)

CF from financing decreases by 100 for loan pay back

Net cash decreases by 68

BS

Cash is down 68
PPE down by 80

Debt down by 100
NI down by 48

Both sides balance

Question 10

Ordering 100 inventory cash

Answer 10

IS

/

CFS

Inventory up by 10, an asset, so CF OP down by 10

BS

Inventory up by 10
Cash down by 10

Balance.

Question 11

Sell ipod for 20, COGS 10

Answer 11

IS

Revenue up by 20
COGS up by 10

Gross profit is 10
Operating income up 10
Net income up 6

CFS

NI up by 6
Inventory decreased by 10 which increases CF by 10

Net cash has additional 16

BS

Net cash up by 16
Inventory is down by 10

Net income up by 6

Balance

Question 12

Negative S.H.E.

Answer 12

Can happen in two scenarios

Dividend recap in an LBO. This means the owner has taken out large portions of equity which could render SHE negative

Or if company is losing money consistently and therefore retained earnings is always declining / sign of a struggling company

Question 13

Net working captial

Answer 13

C.A minus C.L.

A company can pay off its short term liabilities with short term assets, company is sound

Question 14

Negative NWC

Answer 14

Could be due to a business model with high deferred revenue balances (subscriptions)

Could allude to possible bankruptcy

Could be because customer pays upfront so cash geenrted is used to pay off Acc Payable rather than keep cash (retail, restaurants). Could be a sign of efficiency

Question 15

Asset write down

Answer 15

An asset write down is recorded on le IS as a loss. Non cash expense.

So PTI down 100, NI down 60

CFS

NI down by 60
Adjusted in CFOP by 100

Net cash up 40

BS

Cash up by 40
Asset in question is down by 100

Balances out with NI down by 60

Question 16

100 Bailout

Answer 16

Bailout as equity investment from the government

No IS change

CFS

CF Fin up y 100

Net cash up by 100

BS

Cash up by 100
SHE up by 100

Question 17

Liability (debt) write down 100

Answer 17

Liability write downs are recorded as a gain on IS

IS

PTI up by 100
NI up by 60

CFS

NI up by 60
Subtract debt write down in CF OP by 100

Net cash down by 40

BS

Cash down by 40
Debt down by 100
NI up 60

Question 18

Why collect cash and not record revenu

Answer 18

Example in subscription or annual contracts.

Collect cash upfront but, per GAAP rules, you only recognize revenue when you perform the service.

Cash goes into deferred revenue as a liability. As the service is performed, it turns into real revenue on IS.

Question 19

Acc Receivable vs Deferred revenu

Answer 19

Accounts receivable pertain to a service that was performed for which cash has not been collected yet

Deferred revenue is for which cash has been collected but, service not yet performed

Question 20

Cash vs accrual accounting

Answer 20

Cash based accounting recognizes revenues and expenses when cash is exchanged

Accrual accounting recognizes revenue when collection is reasonably certain (order is put in) and expenses when they are incurred rather than paid out

Question 21

Buying with a credit card, cash vs accrual

Answer 21

Cash

Revenue only shows up when transaction goes through. Shows up as revenue on IS and cash on BS

Accrual

Revenue right away, and AR in BS
Once cash is obtained, it will turn into cash

Question 22

Capitalize (cost) or expense a purchase

Answer 22

If the asset has a useful life over a year, it is capitalized (put on BS) and then is depreciated or amortized

Factory is capitalized
Salary is expensed

Question 23

GAAP vs non GAAp

Answer 23

IS under GAAP doesn’t really reflect how profitable a company is because of IS write downs (deferred revenue, amortization)

Non GAAP earnings are almost always higher because these expenses are excluded

Question 24

Positive EBITDA but bankruptcy

Answer 24

Large CAPEX not reflected in EBITDA

High interest expense, cannot afford it

All debt matures at once, cannot refinance and is in a credit crunch, runs out of cash

As significant one time charge, enough to bankrupt

EBITDA excludes investments and depreciation of long term assets, interests and one time charges. All of these could bankrupt the company.

Question 25

Goodwill impairment

Answer 25

Company is acquired and buyer reassesses the intangibles and finds they are worth significantly less than previously thought

Buyer overpaid

Or it can be the company discontinues part of its operations and must impair associated goodwill

Question 26

Goodwill increase

Answer 26

Can increase if a company reassesses its value and it thinks it higher, rare

Usually a company is acquired and goodwill changes as a result of being the plug for purchase price in an acquisition

Company acquires another company and pays more than what assets are worth, reflected in goodwill

Question 27

GAAP

Answer 27

Accrual based, straight line depreciation

Question 28

What is retained earnings

Answer 28

How much of the company’s net income it has saved up

Retained earnings equals

Old retained earnings balance, plus net income, minus dividend issued

Question 29

What non recurring charges are added back to companys EBITDA

Answer 29

Restructuring, goodwill impairment, asset write down, legal expenses, disaster expenses

Question 30

Projection of balance sheet items

Answer 30

AR as % of revenue
Deferred revenue as % of revenue
AP as % of COGS
Accrued expenses as % of operating expenses

Question 31

COGS up by 10

Answer 31

If we are increasing COGS, it is that we are recognizing the expense attached to the sale

IS

If we sell for 20, COGS is 10, operating income is up by 10
NI up by 6

CFS

NI up by 6
Sale of inventory unlocks cash 10

Net cash position increases by 16

BS

Cash up by 16
Inventory down by 10
NI up by 6
Balance

Question 32

Receivables up by 10

Answer 32

IS

PTI is up by 10
NI up by 6

CFS

NI up by 6
Deduct 10 because AR is non cash

CF down by 4

BS

Cash down by 4
Receivables up by 10
SHE up by 6

After collection no change to IS. CFS up by 10, Cash on BS up by 10, SHE up by 10