Hi all,
Got this interview question a while ago and thought I would like to seek for some help from you guys.
So question is:
There is one company reporting $50mm rev, $25mm EBIT and $5mm NI during a certain period. Now the company changed its revenue recognition policy and as a result of that, the company has $60mm rev for the same period. Assuming EBIT and NI holds the same margin, how does this change of revenue recognition impact / flow though the three statements?
My answer during the interview:
IS: NI + 1mm ($6mm NI now based on $60mm rev and same margin) CF: NI + 1mm flows through BS: Cash +1mm , SH Equity +1mm
Interviewer told me that this was wrong because the company did not make additional cash. In fact, it needs to pay more tax (which will reduce its cash) as it overstates its P&L. I hear his story, but cannot figure out how this will flow through the three statements. Asked him the right flow through, he did not tell me the answer.
Can someone share with me about your thoughts?
From a quick look at this my thoughts are these. How is cash going to change at all just by changing recognition. Think about it Cash is cash. Majority of the stuff we deal with in accounting is made up in terms of what money you are owed or are supposed to pay, but money in and out of the door is something that can not be changed with accounting.
Also Im not sure about IS, but my logic is this. Take 50% of the 60 million as before and you get 30 million. now take 25% of that giving you 7.5mil.
Also if your curious how rev can go up without cash going up just think about accounts receivables and accounts payable.
I would have asked for a few clarifications from the interviewer, but working with what you're giving me.
NI increases, A/R increase (use of cash), inventory decreases (source of cash), and there's a increase in DTL (source of cash) and those 3 variables in operating CF creates a net change of 0 in cash.
You should email Brian from the BIWS course; he gets questions like this all the time. Kind of annoying that the interviewer wouldn't tell you what the answer was.
Thanks guys... Anyone else has any clue?
Occaecati error omnis nisi modi reiciendis explicabo. Sapiente ut autem natus voluptatibus sed vel. Voluptas nobis vitae quia reprehenderit.
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...