Accounting

Question 1

What is discount rate?

Answer 1

The opportunity cost of investing in this company. (i.e., if I put this money elsewhere, how much would I expect to make?)

Question 2

How to calculate present value?

Answer 2

Take value, divided by (1+discount rate)^(time periods)

Question 3

What is net present value and how do you calculate it?

Answer 3

It is the additional value of acquiring a company; NPV = Present Value - Initial Cost

Question 4

What is the internal rate of return?

Answer 4

IRR is the discount rate such that the NPV = 0, or PV = Initial cost. It tells you how much an investment returns every period.

Question 5

What does it mean if the IRR of a company is greater than the discount rate?

Answer 5

Investing is smart. You want to invest since discount rate is like the minimum rate of return for a viable investment.

Question 6

What is balance sheet?

Answer 6

Snapshot of a companies assets, liabilities, and equities at a given moment in time. Assets = liabilities + equities.

Assets: cash, inventory, AR, MS
Liabilities: debts, AP, DR
Equities: common stock, APC, retained earnings

Question 7

What is income statement?

Answer 7

Statement of how much value a company generates in a period.

Revenue, COGS, operating expenses, operating profit, depreciation expense, interest expense, pretax income, tax expense, net income.

Question 8

What is cash flow statement?

Answer 8

Cash flow statement is a statement that captures a companies net cash flow over a period of time. A companies cash flow is split into 3 important categories: 1. CFO, 2. CFF, 3. CFI

Question 9

When does something go on the income statement?

Answer 9

An expense goes on the income statement if it affects the amount of tax that the company pays.

Question 10

Why does depreciation expense affect cash flow when it is a non-cash expense?

Answer 10

Depreciation expense is tax deductible, which means companies pay less tax, which is a cash expense.

Question 11

How are the 3 financial statements connected?

Question 12

What do we use goodwill and intangible assets for?

Answer 12

Goodwill and intangible assets are used to explain a higher than book-value price on a business. While identifiable assets may only be $100, the buyer might may $150, and that extra $50 represents those intangible assets.

Question 13

What are deferred taxes?

Question 14

What is CapEx?

Answer 14

Capital expenditures is spending towards long-term assets

Question 15

If I had a CapEx expenditure of $100 at the end of this period, explain the impact on the 3 financial statements at the end of this year and the end of next year.

Answer 15

Year 1
IS: no change
CFS: CFI down 100
BS: Cash down 100, PPE up 100

Year 2, assuming 25% tax rate and DE of 10%
IS: NI down $7.5
CFS: up $2.5
BS: Cash up $2.5, PPE down $10. Retained earnings down $7.5.

Question 16

What is working capital and what does it measure?

Answer 16

Working capital is current assets - current liabilities, and it measures a companies capacity to pay off short term liabilities. It measures if a company is “sound”

Question 17

What is free cash flow? How do you calculate it?

Answer 17

Free cash flow is the money left over after paying for operations (to keep the business running) while maintaining the current size of assets. FCF = CFO - CapEx

Question 18

What is the difference between unleveraged free cash flow and leveraged free cash flow? Give their formulas as well.

Answer 18

Unlevered FCF is cash available to all investors (both debt and equity) before any debt principal payments or interest expenses are made. Levered FCF is cash available to equity investors after accounting for debt obligations.

simple formula Unlevered: CFO - CapEx
Levered: CFO - CapEx - mandatory debt repayments

Question 19

What is Return on Invested Capital (ROIC) and how do you calculate it?

Question 20

What is Return on Assets (ROA) and how do you calculate it?

Question 21

What is Return of Equity (ROE) and how do you calculate it?

Question 22

How do you go from net income to CFO?

Answer 22

Add non-cash expenses like depreciation and stock-based compensation, in addition to changes in working capital (subtract gains, add losses)

Question 23

How do you go from EBITDA to CFO?

Answer 23

Subtract interest, tax, add back non-cash expenses not already accounted for in EBITDA, adjust for change in working capital. Lastly account for things like gains/losses (subtract gains add losses).

Question 24

How do you go from net income to EBIT?

Answer 24

Add back interest and tax expense.

Question 25

How do you go from EBIT to EBITDA?

Answer 25

Add back depreciation.

Question 26

Give me common examples of items go on income statement

Answer 26

Interest, depreciation, operating (SG&A), tax expenses, realized gains/losses

Question 27

Give me items that do not go on income statement

Answer 27

CapEx, inventory, financing activity like issuing stock or raising debt or paying off debt.

Question 28

How do you account for operating leases on the 3 financial statements? Answer not right

Answer 28

IS: lease needs to be considered as interest expense and depreciation expense. Depreciation expense is PV/time periods, and interest expense is rent - depreciation expense. CFS: Add back the depreciation expense. BS: Decrease cash, increase lease asset, decrease PPE (depreciation expense). Decrease retained earnings, increase lease liabilities.

Question 29

A company that follows U.S. GAAP signs a 10-year Operating Lease on January 1. It will pay $160 in Rent each year. Assuming a 5% Discount Rate, walk me through the financial statements over this entire year. For simplicity, you may “round” and assume the Present Value of the lease payments equals $1,200.

Question 30

How do you account for financing leases on the 3 financial statements?

Question 31

A company issues $200 of Debt at a 10% interest rate. Walk me through the entire first year on the statements, including the initial issuance and the full interest payment. COMBINE both steps.

Answer 31

Start of year 1 IS: no change CFS: CFF up 200 BS: cash up 200, liabilities up 200 End of year 1, assuming 25% tax rate IS: $20 interest expense, NI down by $15 CFS: CFF up $185 total BS: cash up $185, liabilities up $200, retained earnings down $15.

Question 32

You go into a job interview, and the interviewer points out that every single Interview Guide has a question about how Depreciation going up by $10 affects the statements. So, he asks you to walk through a $10 *decrease* in Depreciation, assuming a 25% tax rate.

Answer 32

IS: depreciation expense goes down by $10, net income increases by $7.5 CFS: subtract $10 for cash flow of -$2.5 BS: cash down $2.5, PPE up $10, retained earnings up $7.5

Question 33

What is the difference between cash and accrual accounting? Which one captures financial health better?

Answer 33

Differ in the way that they recognize entires. In accrual accounting, revenue is recognized when it is earned and expenses are recognized when they are incurred. Cash accounting recognizes revenue and expenses when the actual transaction occurs. Accrual accounting is better because for companies with a lag time between revenue collection and expense repayment, it can be misleading.

Question 34

Walk me through the difference between an operating lease and a finance lease under ASC 842 (US GAAP) and how each affects the financial statements.