Confused by a Technical Question
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?
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
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