net income will go down by -10M do you have to do anything with cf from financing activities?
overall question is a company takes on 100M debt to pay for 100M in ppe on Jan 1. Assume 10% int, 10% dep and 50% tax rate How does it affect 3 statements
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I wouldnt say I was a technical wizard by any means going into interviews, but you should be able to figure this out in about 30 seconds with a pencil and paper...(and thus apply it without paper in the interview).
I was just wondering how interest expense affected the principal of the debt undertaken on the b.s. should you assume it doesnt bring principal?
down
don't quote me on this but i think the solution is as follows:
INCOME STATEMENT: operating income decreases by 10 interest exp increases by 10 tax shield of 5 effect on net income: -25
CASH FLOW STATEMENT: CFO: net income goes down by 15 depreciation increases by 10 net effect on CFO: -5
CFI: investment in PPE causes cash outflow of 100 net CFI: -100
CFF: debt inflow of 100 financing with debt causes interest cash outflow of 10 net CFF: +90
ending cash balance: -15
BALANCE SHEET: assets: cash decreases by 15 ppe increases by 90 net assets: 75
liabilities/oe: debt increases by 100 add in -25 drop in net income net liabilities/oe: 75
Ok I thought I knew how to answer this question but this doesn't make sense to me. Would it not be Op Income decreases by 10 (Due to 10 dep expense), Interest exp up 10 (Int exp for year), thus, taxable income down by 20, times (1-.5)= Net Income loss of 10?
right...i shouldnt have said no CFF impact, obviously the debt is a source...rather, the interest expense does not reduce the principal balance and no amortization takes place (unless they said you repay x of the loan at the end of year one or something)
IS- Operating income down 10. Pre-tax income down by 20 total. With the 50% tax rate Net Income would be down 10.
CF- Net income down 10 at the top. 10 in depreciation gets added back so overall no change in cash.
BS- PP&E down 10 due to depreciation so assets are down 10. On the other side the net income is down 10 so shareholders equity is down 10 and everything is balanced.
Just FYI usually they make the tax rate 40%. That would change it up a little by making NI down $12 on the income statement. On CF statement the depreciation gets added back because it is a non-cash charge so overall cash flow from ops is down $2. Then on the Balance Sheet you have PPE down 10 and cash down 2 so assets are down 12 overall. On the other side (shareholders equity) the net income is down 12 and it balances.
nyc421 is making it too complicated since you only asked what the effect is on the 31st. Just FYI on Jan 1st there would be no change to the IS. On CF the purchase would make CFI down 100 but you would have a 100 increase in cash from the debt. Overall no change in cash. On BS PP&E is up 100 on the asset side and debt is up 100 for a liability so it balances.
Hope this was helpful
Why don't you add back the 10 in interest expense on the CF Stmt?. That's a non-cash effect right?
Interest expense is most definitely a cash expense. Think about it for a second. You have to pay interest on debt. You don't actually pay anyone for depreciation. Just a tax shield
Makes sense but why not indicate the interest payment on the CF?
Income statement: - Depreciation expenses: up by 10 - Operating income: down by 10 - Interest expenses: up by 10 - Earnings before taxes: down by 20 - Earnings: down by 10 (50% tax rate)
Cash flow statement: - Operating: - Net income down by 10 - Depreciation up by 10 Cash: no change - Investing: - PP&E down by 100 Cash: down by 100 - Financing: - Long-term debt up by 100 Cash: up by 100 Overall: no changes in cash
Balance sheet: - Assets: - Cash: no change - PP&E: up by 90 (net of depreciation) Assets: up by 90 - Liabilities: - Long-term debt: up by 100 Liabilities: up by 100 - Shareholders' equity: - Retained earnings: down by 10 (effect of net income) Shareholders' equity: down by -10
Old post.. but can someone verify? Thanks.
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