Can you, please, help with question: "Assume Inventory decreased by $10. How will it affect three statements?". I suppose that inventory can decreased because it was sold or write off, can be another options?
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I'd check out all the threads related to the 3 financial statements like this one to get some guidance on how to approach these: https://www.wallstreetoasis.com/forums/interview-question-effect-on-all…
I think you are on the right track in regards to what would cause a decrease in inventory. So if this was an interview, you would either need to ask for additional information (i.e. if an inventory sale, how much was it sold for) or make assumptions (such as a margin % or something similar) to run through the impact to the financial statements.
Yes, thank you very much! Can you please tell how deacease of inventory will affect three statements? Thanks!
If you sold the inventory for $20 (50% margin) there would be the following effects:
Income Statement:
Revenue Increase: $20 COGS Increase: $10 Operating Income Increase: $10 Income Tax Increase: $2.50 (assumed 25% effective tax rate in today's world) Net income increase: $7.50
Cash Flow:
Cash Flow From Operations would increase $17.50 if it was a cash sale ($7.50 increase to net income and $10 increase due to the change in inventory. If the inventory was sold on credit, you would have a decrease in CFO of $2.50.
No change to other cash flow sections, investing or financing
Balance Sheet:
Assuming cash sale. Cash is up $17.50, Inventory down $10, net assets up $7.50. Balanced by equity increasing $7.50 due to the increase in net income.
I hope that helps
Perfect! Thank you so much!
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