If a company finds 1M on the ground and gives it to the company, how does this impact the accounting statements and enterprise value. What if someone then stole the 1M (and chucked it into a river), how would the 3 statements change and how would EV change.
My current understanding is EV doesn’t change but how does CFS and BS change. What specific line items in equity changes and what specifically changes in cash flow from financing?
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Taking a stab at this:
EV (assuming you mean enterprise value) does change because it’s affected by net debt which is tied to cash.
No change to IS. Cash goes up in BS, you can increase SE and assume this is “equity”(I’m thinking this is similar to an equity injection). Increase Cash from Financing to account for increase in cash and SE on BS.
If you chuck in river, I think you would reverse these change, though maybe some others will have better ways of doing it than “reverse” changes.
No, taking on debt or equity does not change your EV.
so in this case, let's assume $100 Equity Value, $100 debt, $50 cash
so ev is $100 + $100 - $50 = $150
adding $5M in equity, so now Equity is 105 and cash is 55
$105 + $100 - $55 = $150
No change in EV. Equity value increases, but an increase in cash is a decrease in EV since cash is subtracted. Equity value and cash offset each other
Ok I agree with EV - my bad on this given I mentioned changes to SE in the BS later. Thoughts on the 3-statement changes I noted and/or how to make adjustments if you chuck the cash?
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Income statement - the $1m is recognized under Other Income.
Balance sheet - Cash up by $1m
Cash flow statement - Cashflow from financing activities up by $1m.
EV does not change. Why?
Since cash is up $1m on balance sheet, your assets increased by $1m. But there are no changes to your liabilities so your equity portion also increases by $1m.
A simple way of thinking about EV is EV = equity value + st debt + lt debt - cash & cash equiv. Since there were no changes to debt and since equity value went up by $1m, cash by $1m this cancels out. Thus delta EV is $0.
Edit: Didn't see the part about someone stealing and chucking it into the river. Then the above is reversed.
On the income statement this goes to other expenses. BS cash goes down, CF cash flow out. EV unchanged.
Where is the $1M recognized in financing activities? I would assume you see it flow through net income which is in operating activities.
Good question. To me it doesn't make sense to classify $1m that you randomly picked up as an operating activity. It's more of a funding event than anything else so I'd put it under a capital contribution line.
Because they just GAVE it to you (as opposed to exchanging it for some interest in the firm), it's treated as revenue
I/S - Revenue up 1m, assume 20% tax, NI up 800k CF - CFO up 800k B/S - Cash up 800k, RE up 800 k -> Balanced
EV is unchanged because EV = E + D - C. In this case, Equity value and Cash both increase, thus they offset.
There are some very memorization-based explanations on here, but I like to think about EV and Equity like a house. EV is the value of the HOME itself (or the ongoing operations of the company). Equity is what someone would pay for that home. So if you put a briefcase of $1mm inside the house, the EV (or value of the home itself) is unchanged, however I would now be willing to pay $1 mm more (equity up $1mm), because if I buy the house I ALSO get the $1 mm cash in addition to the structure. This is why we subtract cash to get to EV, because it does not affect the underlying operations of the firm (value of the structure).
In reverse (stolen cash) this would be a loss reflected in earnings.
I/S - Rev down 1000, adjust for tax savings 20%, Rev down 800 CF - CFO Down 800 B/S Cash down 800, RE down 800
EV unchanged, again because E and C both drop 800
Why would the cash be classified under CFO? Surely getting handed cash is nothing to do with the core business operations of the company?
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