IB Interview Accounting Question Help
Is the answer for this PP&E question in BIWS incorrect? Why is PP&E reduced by 90?
At the end of Year 2, the factories all break down and their value is written down to $0. The
loan must also be paid back now. Walk me through how the 3 statements ONLY from the start of Year 2
to the end of Year 2.
After 2 years, the value of the factories is now $80 if we go with the 10% Depreciation per year
assumption. It is this $80 that we will write down on the 3 statements. Also, don’t forget about
the Interest Expense – it still needs to be paid in Year 2.
Income Statement: We have $10 worth of Depreciation and then the $80 Write- Down. We also have $10
of additional Interest Expense, so Pre-Tax Income is down by $100. Net Income is down by $60 at a
40% tax rate.
Cash Flow Statement: Net Income is down by $60 but the Write-Down and Depreciation are both
non-cash expenses, so we add them back and cash flow is
up by $30 so far.
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There are no changes under Cash Flow from Investing, but under Cash Flow from Financing there is a
$100 charge for the loan payback – so Cash Flow from Financing falls by $100.
Overall, cash at the bottom decreases by $70.
Balance Sheet: Cash is now down by $70, and PP&E has decreased by
$90, so the Assets side is down by
$160.
On the other side, Debt is down
$100 since it was paid off, and since
Net Income was down by $60, Shareholders’ Equity is down by $60. Both sides
are down by $160 and balance.
Year 1: PPE down by 10 (10% dep)
Year 2: PPE down by 10 first (10% depreciation)
Then the remaining $80 written off.
So total $90 down in the same year.
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