iBanking Interview process (With Link to Article)

Intense. I'm assuming the whole process is less technical for a non-Finance background such as Engineering, Liberal Arts, Math, etc?

Can somebody walk me through the accounting question?

"If a company buys a piece of equipment worth $100 that is financed with $50 in cash and $50 in debt, list the accounting entries for the next year and explain how this affects the 3 accounting statements."

Accounting is by no means my strong suit and I kind of get lost after the initial entry of equipment up $100, cash down $50, and accounts payable up $50.

From the blog author (saw a huge bump in traffic today, thanks Nefarious!)

The addendum to this question was that I didn't have enough information to answer it (he said I would need to ask him 'relevant' questions). The first question I asked was the nature of depreciation, to which he replied "10 years straight line, no salvage".

So you can begin with the income statement.

Depreciation expense increases by $10. Net Income Before Tax decreases by $10

Now you need a tax rate, "50%".

Tax Expense decreases by $5 Net Income Decreases by $5

Now go to the Cash flow statement

Cash used for operating will decrease by $5 because of tax expense (assuming you pay with cash)

Now for the Balance Statement

Assets Decrease in cash by $55 Increase in PPE by $100 Net Change = $45

Liabilities Increase by $50 (assuming no interest payments, if you're given interest expense its just an additional cash outlay that also has a tax shield)

Equity Decrease $5 because NI is $5 less and it flows into Retained Earnings.

And that is what I WISH I'd said!

Sum up it up for you.

Ask if you can assume straight line depreciation / salvage value and what the interest rate on the debt is.

Initially accounting for the trasaction, no change to the I/S. Now move over to the cash flow statement. No change to CFO. CFI - Down by 100 because of CAPEX. CFF- Cash will be up by 50 because of the debt used to finance the transaction. Overall Cash will be down by 50 which will flow into the cash account under assets on the B/S. Now under PP&E the piece of equipment will reflect the value of $100 leaving total assets up by $50. Now Long Term Debt will be up by $50 and the B/S balances.

Now after Y1, assuming straight line depreciation over 10 years your depreciation expense will be $10 and lets assume no interest expense on the debt for simplification. (Always ask all the details to show that you know what your talking about). Pre tax income is now down by 10 and assuming a 50% tax rate NI down by 5. This 5 flows into NI under CFO and you add back the 10 because it is a non cash expense so CFO is overall up by 5. Ending Cash up by 5 flowing into cash on the B/S. PP&E is 90 and depr expense is 10. NI will also flow into Retained Earnings making everything balance.