Investment Banking Accounting Questions
I know as a current investment banking analyst I am suppose to know the answer to all accounting questions, however, as someone who did not major in accounting in college I feel as if I struggle in this area. I currently work at a boutique and hoping to break into larger banks. One question I am struggling to find an answer online is:
"A company makes a $100 cash purchase of equipment"
I have found two answers to the question including:
- Income Statement:No impact b/c it is considered capex, which , no depreciation doesn’t impact earnings
- CFS:
- No change to net income so no change to CFO.
- However we’ve got a $100 increase in capex so there is a $100 use of cash in CF from investing activities.
- No change in CF from financing (since this is a cash purchase) so the net effect is a use of cash of $100.
- Balance Sheet: Cash (asset) decrease $100 and PP&E (asset) up $100 with no effect to liabilities so we are balanced.
OR
- Balance Sheet – Cash decrease, PP&E increase and no effect to liabilities unless you borrowed money
- Income Statement Depreciation goes up, Net Income goes down by depreciation expense because depreciation is a tax shield
- Cash flow – Net income goes down; depreciation would be adjusted so ending cash decreases
Which answer do you think is the best? If you have a different answer please let me know. Thank you.
IS: Nada
____________
CF:
($100) CFI
Cash is ($100)
______________
BS:
Cash ($100)
PP&E 100
Both sides balance
I'm surprised you don't understand the 2nd part if you work in IBD. The 2nd part is at the EOY after they have actually incurred dep exp (assume 40% tax and 10% dep)
IS:
Dep exp: $10
Tax: ($4)
Net inc: ($6)
_____________
CF:
Net inc ($6)
Dep $10
Cash is up $4
_____________
BS:
Cash $4
PP&E: ($10) so assets are ($6)
L/SE:
Retained earnings: ($6)
I'm sorry, but most freshman hardos in college can answer these questions. You are an analyst already? I could understand if it was some more niche or advanced accounting but this seems like you are at stage 0 of preparation.
I had 2 answers and just wanted to clarify which seemed more accurate.
Make sure to ask if it's being paid in all cash / debt / combo of both. If it's debt, they can follow on and ask what the 3 statements look like after the next year- and there you'll record the interest along with depr & any am on the note. Also, if it's paid in debt, you can say that you'd put a non-cash disclosure on the CFS- people would eat that up
I understand what you are trying to get at, basically say your first answer and that should be it and if they follow up with something like what happens at the end of the year, you can say your part 2 answer.
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