Accounting - 3 FS Scenarios Flashcards
(37 cards)
Walk me through how Depreciation going up by $10 would affect the statements.
- Noncash expense on the income statement. Tax rate? 40%. Net income down by 10*(1-T)=6
- CF = net income down 6, D&A up 10 = cash up $4mm which is your tax shield
- Cash up 4, PPE down 10 = assets down 6. NI and RE down 6 as well
What happens when Accrued Expenses increases by $10?
Expenses that have been accrued but not paid. Treat as a non-cash expense, assuming in SG&A for example
1. SG&A up 10, NI down 6
2. Never paid cash; accrued exp is working capital account, liability up 10, cash up 4mm
3. Assets - cash up 4
L = Acc Liab up 10
E = RE down 6
What happens when Accrued Expenses decreases by $10 (i.e. it’s now paid out in the form of cash)? Do not take into account cumulative changes from previous increases in Accrued Expenses.
Payment of working capital; already been incurred so it does not show on the income statement.
- IS = no impact
- CF = acc liab down 10, cash payment of 10
- BS: cash down 10, acc liab down 10
Accounts Receivable increases by $10. Walk me through the 3 statements.
Working capital account. Recognize AR when revenue has been earned but you have not been paid.
1. Sales up 10; for illustrative purposes, okay to assume no COGS? Cool. Taxes of 4mm, NI up 6
2. CF: NI up 6, AR up 10; Cash down 4mm which is equal to your tax check.
BS: cash down 4, AR up 10; net +6
RE: NI up 6
- Prepaid Expenses decreases by $10. Walk me through the statements. Do not take into account cumulative changes from previous increases in Prepaid Expenses.
Expense that has been paid but has not been incurred (i.e. prepaid rent, insurance, etc.)
- When it decreases, you are recognizing the expense
1. -10 in expense, -6 in NI
2. -6 NI, +10 for unwind in Prepaid = 4 cash
BS: Cash up 4; prepaid down 10 = -6 = RE
- A company sells some of its PP&E for $120. On the Balance Sheet, the PP&E is worth $100. Walk me through how the 3 statements change.
Assume done on the first of the year.
IS: $20mm gain. NI up $12.
CF: gain is non cash / and is captured in investment proceeds: Net income of 12; -20 in CFO; +120 of proceeds from sale; 112 of cash. Check = tax of 8mm.
BS: Cash up 112; ppe down 100 = 12
RE: up 12
- Walk me through what happens on the 3 statements when there’s an Asset Write-Down of $100.
IS: write down of 100; NI down (1-T)*100=60
CF: NI = -60, impairment of 100; cash up 40
BS: cash up 40; building down 100 = down 60, which equals NI
- Explain what happens on the 3 statements when a company issues $100 worth of shares to investors.
Dr. Cash, Cr. equity issuance.
CF = show +100 in CFF
Equity up 100, cash up 100
- Let’s say we have the same scenario, but now instead of issuing $100 worth of stock to investors, the company issues $100 worth of stock to employees in the form of Stock-Based Compensation. What happens?
Non cash expense; Dr. SBC, Cr. Equity
NI = -100 * .6 = -60
CF = CFO = -60+100=40
BS = Cash 40, Equity = 100, RE= -60
- A company decides to issue $100 in Dividends – how do the 3 statements change?
Assume cash on balance sheet
Dr. Retained earnings, Cr. Cash
- A company has recorded $100 in income tax expense on its Income Statement. All $100 of it is paid, in cash, in the current period. Now we change it and only $90 of it is paid in cash, with $10 being deferred to future periods. How do the statements change?
Deferred tax liability.
No change to tax expense per book, but you reflect on the cash flows, recognizing 10 increase in DTL.
Cash down 90.
DTL up 10. RE down 100.
- Walk me through a $100 “bailout” of a company and how it affects the 3 statements.
Please define “bailout”. Cash infusion in equity, preferred, debt; buying assets, etc.
Debt?
CF: CFF up 100, cash up 100
BS: Cash 100, Gov’t loan up 100
- Walk me through a $100 Write-Down of Debt – as in OWED Debt, a Liability – on a company’s Balance Sheet and how it affects the 3 statements.
Effectively a gain; may be taxed on the OID if considered a substantial change. Let’s say you are taxed.
$100mm write down = gain, $60 to net income
CF: -60 + 100 = -40
BS: cash -40; bond = -100; RE +60
- Wait a minute – if writing down Liabilities boosts Net Income, why don’t companies just do it all the time? It helps them out!
Rx with lenders, which comes with another headache.
- Concessions / fees for amendment
- Advisor fees
- Also must accurately report your liabilities
- Let’s say Apple is buying $100 worth of new iPad factories with debt. How are all 3 statements affected at the start of “Year 1,” before anything else happens?
Clarify structure, are you raising cash to buy factory or are you issuing the debt as consideration?
- Cash first.
IS unchanged
CF: Building in CFI -100; Debt issuance +100
BS: Building +100, Debt +100
- Now let’s go out one year, to the start of Year 2. Assume the Debt is high-yield, so no principal is paid off, and assume an interest rate of 10%. Also assume the factories Depreciate at a rate of 10% per year. What happens now?
Assume that we have already factored in the changes from Part 1 and are only tracking what happens AFTER those have taken place.
After year 1… 10% interest, 10 year life. $10mm interest and $10mm D&A.
IS: -$20mm; NI -$12 if tax = 40%
CF: NI -12, D&A +10 = Cash down -2
BS: Cash -2, PPE - 10; NI -12
- At the end of Year 2, the factories all break down and their value is written down to $0. The loan must also be paid back now. Walk me through how the 3 statements ONLY from the start of Year 2 to the end of Year 2.
Let’s hope you have the cash.
First, must recognize current D&A to find the book value of PPE. Same exercise as before.
NI down 6, cash up 4, PPE down 10 = carrying value of 80
IS: Write down of -80 plus -10 interest, taxes paid of 40% = NI down 54
CF: NI -54, Write down +80 = 24mm cash
CFF: pay back 100mm
Net cash = -74
BS: cash -74, PPE -80 = -154 = Debt -100 0 54 in RE
- A company raises $100 worth of Debt, at 5% interest and 10% yearly principal repayment, to purchase $100 worth of Short-Term Securities with 10% interest attached. Walk me through how the 3 statements change IMMEDIATELY AFTER this initial purchase.
CFI = -100 of ST Securities
CFF = +100 LT Debt Issuance
= 0 Cash
BS; Asset in marketable securities, liability in debt
- Now walk me through what happens at the end of Year 1, after the company has earned interest, paid interest, and paid back some of the debt principal.
LT Debt:
- Interest =5, Amort = 10
ST Debt = interest INCOME = 10
IS: +5 in interest income (net), NI up 3
CF: +3 NI, less Debt paydown of 10 = Cash -7
BS: Cash -7, Debt -10, NI +3
- Now let’s say that at the end of year 1, the company sells the $100 of Short-Term Securities but gets a price of $110 for them instead. It also uses the proceeds to repay the $90 worth of remaining Debt.
Walk me through the statements after ONLY these changes.
Gain of $10mm assuming that's the carrying value. IS: Gain of 10, NI up 6 CFO NI up 6, gain -10 = -4 CFO CFI Sold securities +110 CFF paydown -90 Net Cash = 16
Cash 16, Securities -100 = -84 assets
LT Debt -90, NI +6 = -84
- You own 70% of a company that generates Net Income of $10. Everything above Net Income on your Income Statement has already been consolidated.
Walk me through how you would recognize Net Income Attributable to Noncontrolling Interests, and how it affects the 3 statements.
Assume you have control and consolidate.
NI +7, NCI +3 = cash at 10
Cash +10
NCI +3
RE +7
- You own 70% of a company that generates Net Income of $10. Everything above Net Income on your Income Statement has already been consolidated.
Walk me through how you would recognize Net Income Attributable to Noncontrolling Interests, and how it affects the 3 statements. - Let’s continue with the same example, and assume that this other company issues Dividends of $5. Walk me through how that’s recorded on the statements.
30% of the dividends will be distributed, but since you show 100% of the cash, the intercompany transfer won’t be reflected in the consolidated CF.
No IS impact
CFF: -1.5
NCI: -1.5
- Now let’s take the opposite scenario and say that you own 30% of another company. The other company earns Net Income of $20. Walk me through the 3 statements after you record the portion of Net Income that’s you’re entitled to.
Equity method of accounting
NI attributable to affiliates = 30%*20=6
Subtract out of CFO because non cash. Net cash zero
Affiliate interest up 6, RE up 6
- Now let’s assume that this 30% owned company issues Dividends of $10. Taking into account the changes from the last question, walk me through the 3 statements again and explain what’s different now.
Recognize dividends as income in CFO and reduce Affiliate balance accordingly.
CFO: Dividend received = cash of 30%*10=3
BS: cash +3, Affiliate balance -3
