How will an increase in Accrued expenses impact Net Income etc?
Prepping for an interview at a big-name Mutual Fund..saw something contradictory in the prep guide i am using so wanted to get some advice?
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Credit to accounts payable and debit to expenses.
Effect on net income: goes down as you recognize the expenses. Effect on BS: Liabilities (accrued expenses/accounts payable) goes up.
The only difference here between accruing expenses rather than paying them out is that rather than cash going down, liabilities go up. When you pay the expenses, credit cash, debit accrued expenses. No real difference on net income by accruing rather than paying out when incurred.
Assume it's $10, 40% tax rate for simplicity Start with Income statement: SG&A goes up 10, taxable income goes down 10, net income down 10(1-.4) = 6 Cash flow statement: Net Income down 6, change in net working capital up 10, net cash effect up 4 Balance sheet: Cash up 4 on asset side, current liabilities up 10 and retained earnings down 6 on the liabilities + SE side, balance sheet is balanced
At least that's what I would think.
How exactly is the cash on your balance sheet going up by $4 in this situation? Cash doesn't move until you pay out the expense, at which point cash goes down, liability goes down.
I think you're getting confused with the relationship of the BS and statement of cash flows. The SCF is to reconcile your net income to true cash flows. So, you would be effectively stripping out the accrual of expenses from your net income to bring it back to a cash figure, but this doesn't affect your balance sheet in the way you said. Cash flows is driven off of the change in your balance sheet, not the other way around.
I think you're right. What would be the order so that everything links together though?
Cash goes up by 4 b/c the tax savings. NI is down 6 and you add back the NON-CASH expense under operations section of 10 so you are up $6 as a result of the tax savings / the fact that it was a non-cash expense.
If NWC = CA - CL, and CL is increasing by $10, doesn't it mean that NWC will decrease by $10?
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