Interview Questions Solution
Hey guys, I recently failed an Interview based on that question, which took me by surprise, as I felt like my accounting skills were alright and I understood the concept, but I was wrong.
So, just to make sure I won't struggle with this in the future, could someone pls solve this question for me?
In y0 (last day of the year) you buy a new machine worth 300 with 50% debt at 10% interest, the rest is cash. The machine has a useful life of 10 years. 20% Tax Rate
Walk me through the effects on the three statements after 1 year.
Is this correct?:
P&L
EBT is -45
Net Income is -36
CFs
Net Income -36
D&A +30
Cash -6
BS
Machinery -30
Cash -6
Retained Earnings/Equity -36
Hit me up, I got a bunch of prep and qbank questions that I have gathered and built over the years. We and all the other banks use a rotation of 200 questions.
Would appreciate this, thank you!
I can't access your profile, but I'd love access.
If you could please let me take a look that would be huge!
Would love access too! But your profile is not visible.. :/
I'll take a stab. If this is truly what dinged you, it is silly. However, you probably should have mentioned what happens on the last day of Y0.
We assume no depreciation or interest accrues in Y0 since it is the last day. For investing activites, capex make this -300. For financing, debt proceeds makes this +150. As mentioned, there are no operating activities (since it is the last day of Y0), so net cash flow is -150.
This aligns with the obvious > debt is up 150, real assets up 300, cash down 150, so both sides balance.
Your math is correct, but you could have mentioned it with the "indirect method" terminology where interest and the tax benefit are baked into net income.
The other thing you could have mentioned/clarified is if the debt with interest-only with a balloon or regular amortization. If they wanted amortization, that would change the math and bring in financing activities during Y1.
Edit: you probably should have clarified that overall income stays constant as well versus the new machine adding on x% income on top of the gross profit %.
TLDR; your math is correct, but they probably wanted more and deeper explanations of mechanics.
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