Accounting Concepts Flashcards

Question

Could you ever have negative Shareholder's Equity? What does that mean?

Answer 1

Yes. A few scenarios where this could happen 1) Leveraged Buyouts with dividend recapitalizations = the owner of the company has taken out a large portion of its equity (usually in cash), and this can sometimes turn SE negative. 2) If the company has been losing money consistently, causing a declining Retained Earnings balance as part of Shareholder's Equity.

Answer 2

Net Working Capital = Current Assets - Current Liabilities It's used to gauge 1) liquidity and 2) short-term financial health = whether a company can pay off its short-term Liabilities with its short-term Assets More commonly used in finance is Operating Working Capital = Operating Current Assets (-Cash, -Financial Investments) - Operating Current Liabilities (-Debt) which excludes items that relate to financing and investing, focusing solely on operations. Changes in Operating Working Capital appear on the CF in CFO, and tells you how these operationally-related balance sheet items change over time.

Answer 3

No. Purchases and sales of investments are considered investing activities, not operational activities. Therefore, Short-Term Investments might technically be included in Net Working Capital, but not Operational Working Capital, which is what we generally mean when we use the term "Working Capital" in finance.

Answer 4

Negative Operating Working Capital is not always a bad sign. Some examples of this: 1) companies with subscriptions or longer-term contracts often have negative OWC because of high Deferred Revenue balances -- customers have paid upfront for services they have not yet received. 2) retail & restaurant companies (Amazon, Walmart, McDonalds) often have negative OWC because of high Accounts Payable. Customers pay upfront but they wait weeks or months to pay their suppliers -- a sign of business efficiency and healthy cash flow. Bad sign 3) financial trouble or possible bankruptcy, when a company owes money to suppliers (Accounts Payable) but cannot pay with Cash on hand.

Answer 5

Cash-based accounting recognizes revenue and expenses when cash is received or paid out. Accrual-based accounting recognizes revenue and expenses when 1) control of goods/services are transferred to the customer and 2) when payment is reasonably assured. Expenses are matched to the period of the corresponding revenue.

Answer 6

Cash-based accounting: - revenue is not recognized until the cash is transferred to the company, aka after the customer has paid his credit card bill and the card issuer transfers the money to the company's bank account. - At this point it would add to IS Revenue and BS Cash. Accrual-based accounting: - revenue is recognized immediately because 1) control of the TV has been transferred to the customer and 2) payment is reasonably certain. - IS Revenue increased, BS Accounts Receivable increased

Answer 7

Many companies have non-cash charges such as Amortization of Intangible Assets, Stock-based Compensation, and Write-Downs on their IS, which negatively affect Net Income. Companies therefore report alternative "Pro Forma" metrics that exclude these expenses and paint a more favorable picture of their earnings, under the argument that these metrics better represent "true cash earnings".

Answer 8

There are a few possibilities. 1) the company was spending too much on Capital Expenditures, which are not reflected in EBITDA but are true-cash expenses. CapEx can make a company cash flow negative. 2) the company has a high Interest Expense and can no longer afford its Debt. 3) the company's Debt all matures at the same time and the company is unable to refinance due to a "credit crunch" (period where banks are reluctant to lend money), and it runs out of cash to pay back its Debt. 4) it has significant one-time charges (ex: litigation) that have been excluded from EBITDA but are high enough to bankrupt the company.

Answer 9

Usually Goodwill Impairment happens when 1) a company has acquired another company and the acquirer assets what it really got out of the deal (customer relationships, brand name, IP) and finds those Assets are worth less than they originally thought. This happens in acquisitions where the buyer "overpaid" for the seller, and it can result in extremely negative Net Income on the IS. 2) This can also happen when a company discontinues part of its operations, and therefore impairs the associated Goodwill.

Answer 10

Deferred Revenue is a Liability on the Balance Sheet. Any increase in a liability is an increase in a source of funding, and therefore increases you cash flows, while a decrease in liability decreases your cash flow.

Answer 11

It depends on what statements you pick. If you have the IS and "starting" and "ending" BS for that period, you can construct the CF. But there might be some ambiguity (you see net PP&E changes, but not separation of CapEx and D&A) If you had the IS and CF, you could technically move from the "starting" BS to the "ending" BS. However, you cannot construct the IS from CF and BS, because there aren't enough links between the statements.

Answer 12

Goodwill is the gap between = cookie jar, during good times you put money into Goodwill, bad times you take it out. Other intangible assets = you can name them, they can amortize.

Answer 13

This is like asking, "if declaring bankruptcy helps you relieve your debt obligations, why not rack up debt?" Because it may help in the short term, but in the long term it hurts the company's credibility and ability to borrow in the future. If a company continually writes down its Liabilities, investors will stop trusting it and it will eventually be unable to raise debt. The inability to borrow again outweighs the short-term benefit to Net Income.

Answer 14

LIFO stands for "Last-In, First-Out" and FIFO stands for "First-In, First-Out". They are two different ways of recording the value of Inventory and the Cost of Goods Sold (COGS). With LIFO, you use the *most recent Inventory additions* for COGS, while for FIFO you use the *oldest Inventory additions* for COGS. Example Starting inventory balance is $100 (10 units, $10/unit) Q1: add 10 units, $12/unit = $120 Q2: add 10 units, $15/unit = $150 Q3: add 10 units, $17/unit = $170 Q4: add 10 units, $20/unit = $200 You sell 40 of these units for $30 each. Revenue = (40)(30) = 1200 LIFO COGS = 200 + 170 + 150 +120 = 640 FIFO COGS = 100 + 120 + 150 + 170 = 540 As prices increase, LIFO will give higher COGS and lower Inventory values. FIFO will give lower COGS and high Inventory values.

Answer 15

If a company changes its method of inventory valuation from LIFO (last in, first out) to FIFO (first in, first out) in an inflationary environment, it means that the cost of goods sold (COGS) will fall, since goods purchased earlier are being charged to COGS and ending balance of inventory will rise since recently purchased goods will now be reflected in ending inventory. This means that income will rise in the IS, and value of assets will increase in the BS.

Answer 16

1) Changing accounting practices under GAAP (e.g. switching between S‐L Depreciation and Double Declining Balance; changing between LIFO and FIFO; etc…). 2) “Big bath” (taking negative hits in an already bad year and basically just writing the year off) or “Cookie Jar Accounting” (reducing top‐line revenues in good years and keeping them on reserve for bad years).

Answer 17

A creditor’s measure of an individual’s or company’s ability to meet debt obligations. Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to compensate for risk. Protective covenants are written into loan agreements that allow the lender some controls. These covenants may: 1) Limit the borrower’s ability to weaken their balance sheet voluntarily e.g., by buying back shares, or paying dividends, or borrowing further. 2) Allow for monitoring the debt requiring audits and monthly reports 3) Allow the lender to decide when he can recall the loan based on specific events or when financial ratios like debt/equity, or interest coverage deteriorate. Credit scoring models also form part of the framework used by banks or lending institutions to grant credit to clients. For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively.

Answer 18

1) Deprecation & Amortization 2) Stock-Based Compensation 3) Unrealized Gains & Losses 4) Asset Write-downs 5) Goodwill Impairments

Answer 19

LIFO is when you use the most recent inventory purchases towards COGS when you manufacture products. In the case that inventory prices are rising, using LIFO would mean that your COGS would be larger (than if you used FIFO). A larger COGS results in lower Pre-Tax Income and therefore, lower tax expenses (all else equal). So, using LIFO when inventory costs are rising helps reduce your tax expense.

Answer 20

Common Mistake = Inventory is part of Working Capital, but changes in Working Capital do not always show up on the Income Statement. Inventory expense is only recognized when the goods associated with it are sold/revenue is generated from the inventory.

Answer 21

Technically, this would happen when a company reassesses its Goodwill value and finds Goodwill has increased in value, but this is RARE. Possible cause 1) the company gets bought out/acquired and the Goodwill changes as a result, as its the "plug" for purchase price in an acquisition. Possible cause 2) the company acquires another company and pays more than its assets are worth, which is then reflected in Goodwill for the combined outcome.

Answer 22

Stealth accounting question... was looking for how line items are effected by cost synergies and how it increases EBITDA and then multiples for overall value

Answer 23

While it's true that equity issuances don't create a mandatory interest expense on the IS, or future cash costs, their main downside is that the company is selling part of itself to outsiders. When a company raises Equity from new investors, the group's original investors get diluted, meaning 1) they receive less in cash proceeds if the company decides to pay its shareholders 2) if the company ever sells itself, the original owners receive less from the sale

Answer 24

reason 1) it is a non-cash expense. Adding a non-cash expense on the income statement reduces the net amount of taxes owed on revenue, and adding this back in the CF reflects the cash savings of that tax shield reason 2) because it allows us to NORMALIZE EARNINGS -- different companies use different methods of depreciation, and adding back D&A allows use to more easily compare firms without that added variability. This is especially important in Industrials firms.

Answer 25

An Asset provides a future benefit to the company via future cash flow, business growth, or tax savings. A Liability or Equity line item is something that results in a future obligation for the company, such as cash payment or requirement to deliver a product. Liabilities are often linked to external parties -- lenders, suppliers, or the govt. Equity line items are linked to the company's internal operations. Liabilities and Equity act as funding sources for a company's resources (Assets), but Equity line items tend not to result in direct cash outflows in the same way as Liabilities.

Answer 26

You list an item on CF if 1) it is a non-cash IS line item Examples: D&A 2) it has NOT appeared on IS and affects a company's real cash flow Examples: CFI CapEx, CFF Dividends

Answer 27

In the short-term, the company's cash flow would decrease because it is no longer receiving cash upfront. The long-term impact depends on the results of sales given this change. If sales grow substantially, the increased revenue will offset the company's longer cash collection process and the long-term cash flow might increase.

Answer 28

In the short-term, no, because the company is paying 12*monthly rent in a single month rather than one cash payment per month. On the IS in month 1, the company will recognize only monthly rent for that month. On the CF the company will record 12*monthly rent under "change in pre-paid expenses" as a cash outflow. A 10% discount represents over a month of rent, so the company's cash flow in month 1 will decrease substantially. Over the entire year, however, this prepayment will improve the company's cash flows because there will be no additional rent payments after month 1, and the total amount paid in cash will be 10% less by the end of the year.

Answer 29

Yes, because in IS Depreciation is often embedded in COGS or Operating Expenses, not a separate line item.

Answer 30

A company collects cash payments for a monthly service in advance bc it has the market and pricing power to do so. Because of the time value of money, it's better to collect cash today rather than waiting several months or a year into the future. This practice always boosts a company's cash flow. It corresponds to Deferred Revenue (L), which increases cash flow. When this cash is recognized with revenue, Deferred Revenue (L) declines, and this appears as a negative entry to CF.

Answer 31

AR provides a future benefit to the company, increased cash flows in the future. Deferred Revenue is a future obligation for the company, as the company has collected all the cash associated with the sale but is not responsible for delivering the product/service. These two line items are the opposite of each other via cash/revenue recognition.

Answer 32

Prepaid Expenses have already been paid in cash but haven't been recognized on the IS. When they occur on the IS they are effectively "non-cash expenses" and reduce a company's taxes, which makes them an Asset. Accounts Payable and Accrued Expenses are usually both expenses that are recognized on the IS, but have not yet been paid in cash. AP happens with specific items with invoices (customer orders, legal bills) while AE happens with recurring items without invoices (employee wages, utilities). *exception = sometimes AP could be items that have not yet appeared on IS, such as purchases on Inventory on credit.

Answer 33

On a superficial level the CEO is right, but not in reality. 1) the full amount of SBC is not deductible for Cash Tax purposes in most countries, so even if Book Taxes decrease, Cash Taxes likely will not. The eventual tax deduction will take place much further into the future when employees exercise their options or receive their shares. 2) SBC creates additional shares, diluting existing investors and "costing" the company ownership and ability to share in future upside.

Answer 34

Debt & Equity Debt is cheaper, often preferred to use. Company must be able to service its Debt by paying for the interest expense & principal repayments. If it can't do that it must use equity instead. Both Equity & Debt issuances show up on the CF statement only, as they boost the company's Cash balance. Equity, share count increases immediately after issuances, dilutes existing investors. Debt, interest payments reflected on IS reducing Net Income & Cash in CF, debt principal repayments in CF and BS.

Answer 35

Loss is a non-cash expense because you haven't "lost" anything in cash in the current period. When you sell equipment for $85, you get $85 in cash from the buyer. You didn't "spend" $15 because you sold the equipment at a reduced price. The Loss means you spent more than $85 to buy this equipment in a PRIOR PERIOD. But non-cash adjustments are based on what happens in the CURRENT PERIOD.

Answer 36

A company might "write-down" an Asset if its value has declined substantially, and its current book value is no longer accurate. Examples: hurricane, new technology makes factory obsolete Affect on statements: you record write-down as non-cash expense & reduce Net Income on IS, add back non-cash expense on CF, and reduce BS Asset + reduce SE retained earnings Write downs are NOT tax-deductible, so you also record negative adjustment under Deferred Taxes on CFS. BS Deferred Tax Asset increases.

Answer 37

A company might do this if they have excess Cash and cannot think of anything else to do with it. Can't: hire more employees, buy more PP&E, acquire other companies, doesn't want to issue Dividends to investors, repurchase stock, repay Debt. Initial purchase will show only on CF, under CFI and will reduce cash flow. After interest Income from investments will show on IS and boost pre-tax income, Net Income, and Cash.

Answer 38

Yes it could. CSE components: Net Income + Dividends 1) If Net Income is repeatedly negative, CSE could turn negative as well. 2) If it issued too much in Dividends 3) repurchased too many shares

Answer 39

You create Goodwill and Other Intangible Assets after an acquisition to ensure the BS balances. In an acquisition, you write down the seller's CSE and combine its Assets and Liabilities with those of the acquirer. If you paid exactly what the seller's CSE was, there's no problems (the BS balances). However most acquisitions reflect a premium for target companies, which means the BS will go out of balance. You allocate value to Other Intangible Items like trademarks, patents, IP, and customer relationships, and the remainder of the premium goes into Goodwill.

Answer 40

Goodwill does NOT amortize / stays constant unless it is "impaired" (the acquirer decides the company is worth less than it immediately expected and writes down the Goodwill = expense IS, non-cash CF). Other Intangible Assets amortize over time unless they are indefinite-lived. Amortization shows up on the IS, CF as non-cash expense, and BS Asset decreases until it has amortized completely. Neither Goodwill Impairment nor the Amortization of Intangibles is deductible for Cash-Tax purposes, so the company's Cash balance won't increase. Instead, the Deferred Tax Asset or Deferred Tax Liability will change.

Answer 41

The short answer is $2 million. Except for certain liquid financial assets that can be written up to reflect their fair market value ("FMV"), companies must carry the value of assets at their net historical cost.

Answer 42

Growth Capex: The discretionary spending of a business to facilitate new growth plans, acquire more customers, and expand geographically. Throughout periods of economic expansion, growth capex tends to increase across most industries (and the reverse during an economic contraction). Maintenance Capex: The required expenditures for the business to continue operating in its current state (e.g., repair broken equipment)

Answer 43

Intangible assets include customer lists, copyrights, trademarks, and patents, which all have a finite life and are thus amortized over their useful life.

Answer 44

Goodwill represents an intangible asset that captures the excess of the purchase price over the fair market value of an acquired business's net assets. Suppose an acquirer buys a company for a $500 million purchase price with a fair market value of $450 million. In this hypothetical scenario, goodwill of $50 million would be recognized on the acquirer's balance sheet.

Answer 45

Under GAAP, public companies are prohibited from amortizing goodwill as it's assumed to have an indefinite life, similar to land. Instead, goodwill must be tested annually for impairment. However, privately held companies may elect to amortize goodwill and under some circumstances, goodwill can be amortized over 15 years for tax reporting purposes.

Answer 46

In accrual accounting, companies are assumed to continue operating into the foreseeable future and remain in existence indefinitely. The assumption has broad valuation implications, given the expectation of continued cash flow generation from the assets belonging to a company, as opposed to being liquidated.

Answer 47

The conservatism principle requires thorough verification and use of caution by accountants when preparing financial statements, which leads to a downward measurement bias in their estimates. Central to accounting conservatism is the belief that it's better to understate revenue or the value of assets than to overstate it (and the reverse for expenses and liabilities). As a result, the risk of a company's revenue or asset values being overstated and expenses or liabilities being understated is minimized.

Answer 48

The historical cost principle states that an asset's value on the balance sheet must reflect the initial purchase price, not the current market value. This guideline represents the most consistent measurement method since there's no need for constant revaluations and markups, thereby reducing market volatility.

Answer 49

The objectivity principle of accrual accounting states that only verifiable, unbiased data can be used in financial filings, as opposed to subjective measures. For this reason, internally developed intangible assets such as branding, trademarks, and intellectual property will have no value recorded on the balance sheet because they cannot be accurately quantified and recorded. Companies are not permitted to assign values to these intangible assets unless the value is readily observable in the market via acquisition. Since there's a confirmable purchase price, a portion of the excess amount paid can be allocated towards the rights of owning the intangible assets and recorded on the closing balance sheet.

Answer 50

Since the cash flow statement begins with net income and net income captures all of a company's revenue (not just cash revenue), an increase in accounts receivable means that more customers paid on credit during the period. Thus, a downward adjustment must be made to net income to arrive at the ending cash balance. Although the revenue has been earned under accrual accounting standards, the customers have yet to make the due cash payments and this amount will be sitting as receivables on the balance sheet.

Answer 51

Deferred Revenue:For deferred revenue, the company received payments upfront and has unfulfilled obligations to the customers that paid in advance, hence its classification as a liability. Accounts Receivable:A/R is an asset because the company has already delivered the goods/services and all that remains is the collection of payments from the customers that paid on credit.

Answer 52

An increase in accounts payable would mean the company has been delaying payments to its suppliers or vendors, and the cash is currently still in the company's possession. The due payments will eventually be made, but the cash belongs to the company for the time being and is not restricted from being used. Thus, an increase in accounts payable is reflected as an inflow of cash on the cash flow statement.

Answer 53

The expression "the line" is in reference to operating income, which represents the point that divides normal, ongoing business operations from non-operational line items. If a profitability metric is "above the line," it reflects a company's operational performance before non-operational items such as interest and taxes. Example: EBITDA In contrast, profitability metrics "below the line" have adjusted operating income for non-operating income and expenses, which are items classified as discretionary and unrelated to the core operations of a business. Example: Net Income

Answer 54

While EBITDA does add back D&A, typically the largest non-cash expense, it doesn't capture the full cash impact of capital expenditures ("capex") or working capital changes during the period. Extra info: EBITDA also doesn't adjust for stock-based compensation, although an increasingly used "adjusted EBITDA" metric does add-back SBC. These non-cash and any non- recurring adjustments must be properly accounted for to assess a company's past operational performance and to accurately forecast its future cash flows

Answer 55

Further context would be required, as negative working capital can be positive or negative. For instance, negative working capital can result from being efficient at collecting revenue, quick inventory turnover, and delaying payments to suppliers while efficiently investing excess cash into high-yield investments. However, the opposite could be true, and negative working capital could signify impending liquidity issues. Imagine a company that has mismanaged its cash and faces a high accounts payable balance coming due soon, with a low inventory balance that desperately needs replenishing and low levels of AR. This company would need to find external financing as early as possible to stay afloat.

Answer 56

The change in net working capital is important because it gives you a sense of how much a company's cash flows will deviate from its accrual-based net income. If a company's NWC has increased year-over-year, its operating assets have grown and/or its operating liabilities have shrunk from the prior year. Since an increase in an operating asset is a cash outflow, it should be intuitive why an increase in NWC means less cash flow for a company (and vice versa).

Answer 57

In the simplest approach, D&A can be projected as either a percentage of revenue or capital expenditures, while capex is forecasted as a percentage of revenue. Re-investments such as capex directly correlate with revenue growth, thus historical trends, management guidance, and industry norms should be closely followed. Alternatively, a depreciation waterfall schedule can be put together, which would require more data from the company to track the PP&E currently in-use and the remaining useful life of each. In addition, management plans for future capex spending and the approximate useful life assumptions for each purchase will be necessary. As a result, depreciation from old and new capex will be separately shown. For projecting amortization, useful life assumptions would also be required, which can often be found in a separate footnote in a company's financial reports.

Answer 58

Current Ratio = Current Assets / Current Liabilities 1) The cash balance used includes the minimum cash amount required for working capital needs - meaning operations could not continue if cash were to dip below this level. 2) Similarly, the cash balance may contain restricted cash, which is not freely available for use by the business and is instead held for a specific purpose. 3) Short-term investments that cannot be liquidated in the markets easily could have been included (i.e., low liquidity, cannot sell without a substantial discount). 4) Accounts receivable could include "bad A/R", but management refuses to recognize it as such.

Answer 59

Not necessarily. Retained earnings can turn negative if the company has generated more accounting losses than profits. For example, this is often the case for startups and early-stage companies investing heavily to support future growth (e.g., high capex, sales & marketing expenses, R&D spend). Another component of retained earnings is the payout of dividends and share repurchases, contributing to lower or even negative retained earnings. In these scenarios, the negative retained earnings mean the company has returned more capital to shareholders than taken in.

Answer 60

To be profitable, a company must generate revenues that exceed expenses. However, if the company is ineffective at collecting cash from customers and allows its receivables to balloon, or if it cannot get favorable terms from suppliers and must pay cash for all inventories and supplies, the company can suffer from liquidity problems due to the timing mismatch of cash inflows and outflows. Profitable companies with these types of working capital issues can usually secure financing, but if financing suddenly becomes unavailable (e.g., 2008 credit crisis), the company could be forced to declare bankruptcy. Alternatively, a profitable company that took on far too much debt in its capital structure and could not service the interest payments may also default on its debt obligations.

Answer 61

Stock-based compensation is a non-cash expense that reduces a company's taxable income and is added-back on the cash flow statement. However, SBC incurs an actual cost to the issuer by creating additional shares for existing equity owners. The issuing company, due to the dilutive impact of the new shares, becomes less valuable on a per-share basis to existing shareholders.

Answer 62

Write-Downs: In a write-down, an adjustment is made to an asset such as inventory or PP&E that has become impaired. The asset's fair market value (FMV) has fallen below its book value; hence, its classification as an impaired asset. Based on the write-down amount deemed appropriate, the value of the asset is decreased to reflect its true value on the balance sheet. Examples of asset write-downs would include damages caused by minor fires, accidents, or sudden value deterioration from lower demand. Write-Offs: Unlike a write-down in which the asset retains some value, a write-off reduces an asset's value to zero, meaning the asset has been determined to hold no current or future value (and should therefore be removed from the balance sheet). Examples include uncollectible AR, "bad debt," and stolen inventory.

Answer 63

Percentage of Completion Method: In the percentage of completion method, revenue is recognized based on the percentage of work completed during the period. This method is used far more common since it's in a company's best interest to record partial revenue once earned. Two conditions must be met to use this method: the collection of payment must be reasonably assured, and the total project costs with the estimated completion date are required to be provided. Completed Contract Method: The completed contract method recognizes revenue once the entire project has been completed. This method is rarely used in the US, as it would result in a company under- reporting revenue that has been earned under the accrual-based system.

Answer 64

Goodwill on the balance sheet remains unchanged unless it's impaired, meaning the purchaser has determined that the acquired assets are worth less than initially thought. While goodwill impairment can be attributed to unforeseeable circumstances, impairments as a common occurrence may raise concerns regarding the management team's history of overpaying for assets or their inability to integrate new acquisitions.

Answer 65

Restricted cash is cash reserved for a specific purpose and not available for the company to use. On the balance sheet, the restricted cash will be listed separated from the unrestricted cash, and there'll be an accompanying disclosure providing the reasoning why this cash cannot be used. An example of restricted cash would be if a company signed an agreement to receive a line of credit, but the lender has required the borrower to maintain 10% of the total loan amount at all times (i.e., "bank loan requirement"). As long as the line of credit is active, the 10% minimum must be preserved to avoid breaching the lending terms. The company may have a separate bank account to hold the funds, or the lender may have required the amount to be placed in escrow to ensure compliance.

Answer 66

PIK stands for "Paid-in-Kind." PIK interest expense is interest charged by a lender that accrues towards the ending debt balance as opposed to being paid in cash in the current period. While opting for PIK may conserve cash for the time being from deferring interest payments to a later date, the debt principal due at maturity increases each year, as well as the accrued interest payment amount.

Answer 67

IS: On the income statement, interest expense will increase by $100, which causes EBIT to decrease by $100. Assuming a 30% tax rate, net income will decrease by $70. CFS: On the cash flow statement, net income will be down by $70, but the $100 non-cash PIK interest will be added back. The ending cash balance will increase by $30. BS: On the assets side of the balance sheet, cash will be up $30. Then on the liabilities side, the debt balance will be up $100 (since the PIK accrues to the debt's ending balance), and net income is down $70. Therefore, both sides are up by $30, and the balance sheet balances.

Accounting Concepts Flashcards

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