Hi all,
Could someone provide answers to the following 2 questions - I was asked this in an interview and while I vaguely remember the answers it would be nice to have confirmed:
Q1: How does an increase of 10 of deferred revenue affect the 3 statements?
Q2: How does an increase of 10 of PIK interest affect the 3 statements?
| +415 | Evercore Intern Seizure | 63 | 5h |
| +128 | UBS IB Americas has failed, now behind Santander and Stiffel | 34 | 11h |
| +97 | Sent my Claude prompt to 200+ Teams chat. MD wants to see me Monday. | 34 | 2h |
| +79 | deleted deleted deleted deleted deleted | 44 | 15h |
| +65 | How do I understand vs. just memorizing? | 11 | 1d |
| +57 | Some banks are overrated as fuck | 17 | 1h |
| +48 | Associate & Above IB exits | 18 | 1d |
| +47 | The good and bad with Wells Fargo | 17 | 54m |
| +42 | Tech to IB Pivot | 22 | 5h |
| +36 | Incoming IB Analyst: Best Ways to Prepare? | 13 | 23h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Generally you can google these or look in the guides -- both of these are in there
Q1:
IS: No change since no revenue was recognized
CFS: Increase in operating cash flow of 10
BS: Cash up 10, Deferred revenue (a liability) up 10
In this one you're receiving cash for future services so you want to reflect that
Q2:
IS: Recognize cash expense of 10, after tax income of 6
CFS: Net income flows in, add back 10 since you're not paying anything out, cash net up 4
BS: Cash up 4, Debt up 10, Net income down 6
Thanks a lot man! Can you just elaborate on Q1: why would there be an increase of 10 on the cash flow section?
Deferred revenue is when the customer pays for something, but the service provider has not yet performed the service from a GAAP perspective (e.g. customer buys a magazine subscription for 12 months). Customer pays $120 for a 12 month subscription, and magazine company recognizes $120 in deferred revenue. This doesn't go on IS because no service has been performed by GAAP, so nothing has been earned. $120 in cash have been received, so you have to put that on the BS and CFS. Each month, you send the magazine to the customer, earn $10 worth of revenue because a service has been performed, and the deferred revenue balance goes down by $10 each month and revenue and equity go up by $10 each month.
doesn't PIK interest lump into the principal of the debt? by "adding back 10" do you mean under the debt line items/CFF?
The 10 is added back on CFS as it is a non cash expense. It is added to debt on BS as PIK interest accrues on the existing balance.
.
Consectetur similique maxime minus velit omnis vitae. Voluptatem et rerum similique quasi voluptatem inventore. Et aperiam asperiores consectetur quos alias. Rem necessitatibus et optio a.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...