Hi WSO,
I am trying to understand my accounting technicals for a long time and I have always struggled with the accounting side of IB questions. I am comfortable with valuation questions, merger, and LBO questions. But it seems the "easy" accounting questions always throw me off.
Could someone explain to me how an increase in $100 in cost of goods sold affects 3 financial statements?
I/S- Pre-tax income down by $100. With 30% marginal tax rate, net income is down $70.
CFS- Net income going down $70 flows into cash flow from operations. There is also a change in working capital as inventory is reduced by $100. Remember that a COGS increase (debit) corresponds to a decrease (credit) in inventory. Reductions in current assets are a cash inflow. So in CFO, we have -$70 and +$100. CFO up by $30. No changes in investing or financing section, so net increase in cash is $30.
B/S- Cash is up $30 and inventory is down $100. Net change in assets is down $70. Net income flows into retained earnings, which is also down by $70. Assets went down by $70 and stockholders equity went down by $70, so we are balanced.
Thanks.
How does a COGS increase result in a decrease of inventory? Especially since your reduction of $100 of COGS leads to a reduction of inventory by $100?
Inventory when sold, reduces to zero and cost of keeping/making that inventory is expensed as cogs in the IS
Quo est neque exercitationem sapiente. Rerum debitis voluptatem laudantium harum rerum atque et. Exercitationem reiciendis maxime dignissimos voluptas. Enim aut dignissimos nihil explicabo et fugiat impedit. Similique magni repellat cum aspernatur.
Ducimus fugit aut voluptatum dolores quo voluptas reiciendis. Sit ipsa animi ut facilis tempora eos. Ipsam minus recusandae enim sunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...