Analyst interview question: price increases, what is affect on balance sheet (other than inventory, cash, RE)
- Suppose you are a manufacturer of wooden chairs and that the price of wood goes up. What is the affect on the balance sheet OTHER THAN a change in inventory, cash, and retained earnings? What is it, and how does it change?
Shot in the dark:
Are we to assume that we increase the price of the chair if we think it can offset the increase in wood price?
If so, accounts receivable increases while accounts payable increases the same amount.
For this question you have to assume future tense. I
ASSUMING everything other than the price of wood stays static.....
The impact will first appear as increased supply expenses on your ledger, which results in an increase in the cost of supplies. This increases your expenses on the cash flow statement and results in a higher cost of goods sold in the net income statement. The result is going to be decreased earnings, which in turn means you're going to see lower cash, and possibly lower retained earnings. That much is fairly basic.
There is a possible impact to accounts payable, but we don't know if this purchases buys supplies on credit or with cash.....but here's another thing most people over look. Any time your earnings change in a real world business, it's also going to have an impact on your deferred tax assets and liabilities.
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