Technical question on selling inventory affecting enterprise/equity value from three financial statements.
I don't know if I am misunderstanding something very obvious or if the BIWS guide has a typo but I can't sleep without solving this question:You sell $200 worth of inventory you intially bought at $100. Calculate change in equity and enterprise value.My Logic: [Income statement]Revenue: 200COGS: 100Gross Profit/EBT: 100Tax: 25%Net Income: $75[Cash Flow Statement]Net Income: $75Cash flow from operations: Change in net working capital, because there aren't any non-cash expenses or taxes we need to add back or subtract.- Change in net working capital = net working capital at the beginning of the period - net working capital now, where net working capital is (Current Operating Assets - Current Operational Liabilities)- Change in net working capital = ($100, from the inventory previously bought - $0) - ($0, inventory gone or sold -$0)Thus, Cash flow from operations: $100Cash flow from investing/financing not affectedNet Cash: $175[Balance Sheet]Assets: $175 (net cash) - $100 (inventory sold) = $75Liabilities: NoneEquity: $75 (retained earnings from net income)Okay, so far so good? Now lets calculate Equity and Enterprise value for the original question.Equity Value: Total Assets-Total Liabilities. From the balance sheet, this would be $75. Thus, Equity Value increases by $75Enterprise Value: Equity Value - Non-operating Assets (cash, investments, etc) + Other L/E (includes preferred stock or debt). Enterprise Value = $75 - $175 = -$100HOWEVER!!!!!The BIWS Guide states that although Equity Value increases by $75 (which I understand from above), Enterprise value is not affected (WHICH I DON'T FREAKING UNDERSTAND WHY) SOMEONE PLEASE FOR THE LOVE OF GOD EXPLAIN HOW ENTERPRISE VALUE ISN'T -$100 SO I CAN SLEEP.Am I screwing up somewhere in my cash flow statement?
Bump
I think they might mean the net change from beginning to end before buying inventory. So you buy $100 inventory initially then sell $100 inventory so +100 then -100. Equity value increases by $75 but cash also increases by $75 so those two cancel out. Net change in operating assets is 0, therefore change in EV is also 0. That's the only explanation I can think of.
Is CNWC something we can control or adjust for the period?
In general, yes, but I think this question is lumping all these events into one time period, otherwise known as a multi-step accounting question, rather than splitting across two time periods. It's just worded kinda weirdly I guess.
Could you explain how that would look like especially on the cash flow statement and with change in net working capital? The -$100 from inventory would be added to the cash flow statement and thus cash flow would increase to $275…
CNWC: $100 - (-$100) = $200
$75 from net income
= $275 total net cash.
There is no change on the statement of cash flows. +$100 then -$100 in the cash flow from operations sections because you buy then sell inventory so no change in net working capital. The only difference is that net income at the top is +$75 so net cash at the bottom increases by $75.
step 1: -$100 to buy inventory
step 2: +$175 from selling inventory
total: +$75 net cash
Ah okay I see. So you're subtracting the net cash from both situations? Why are we doing that again, and is that even okay to do? Sorry of it may seem obvious but I want to solidify the nature of these "two step" questions.
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