Interview Depreciation Question
So I had a first round interview today and got asked the standard depreciation question (How does x amount of dep affect each financial statement?), and I messed up one part of it and even though he explained it to me I can't remember it now. Basically you bought $10 of ppe of which you used $5mil debt and $5mil cash. I got through the income statement ok, but when I got to the cash flow statement I messed up. I thought you were supposed to subtract the full $10 (debt and cash) from the investing activities segment. But he said it was only the $5mil in debt that was subtracted? So my question is why do you not recognize that cash outflow on the cash flow stmt? Thanks
1) For other monkeys, that's not the standard D&A question ('D&A was understated by $10mm, now flow it through the 3 statements')
2) Your question sounds more like buying $10MM of fixed assets: Balance sheet: -$5 cash +$10 PP&E +$5 debt
(so assets up by 5mm and liabilities up by 5 - note no effect to equity, so this doesn't touch the income stmt.)
I/S: See above
CF statement: Cash flow from investing: -$10MM purchase of PP&E
Cash flow from financing: +$5MM proceeds from new debt
Not going to do the $10MM of D&A question, that one has to have been answered many many times (search)
Not sure what happened in your interview...
Ahh I got it the -5 mil cash that you used is part of the -10 mil ppe purchase..
thanks
Thanks Carez.
So IS remains unchanged?
I believe so, yes. Another way to look at it... what profit or loss do you make on buying an asset? None? So no IS effect...
PPE = BS not CF, thus not directly translatable to CF. Ignoring tax:
get debt DR Bank (+5m cash$$$) [cash flow from financing... bc borrowing cash as capital] CR Debt (BS value of +5m)
buy asset DR PPE (BS value of 10m) CR Bank (-10m cash$$$) [cash flow from investing... bc cash used to buy an investment]
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