Accounting Question: COGS Increases by $10 and Revenue goes up $20?
Please...I'm having trouble with this question.
Recognizing Sale of Inventory on Three Financial Statements
When answering the question - "what happens when you sell $10 worth of inventory for $20 in revenue?" you need to walk through the three financial statements as you can see below.
- On the income statement - revenue increases by $20 and the COGS increases by $10. Operating income is then up by $10. Assuming a 40% tax rate, you will record $4 in tax expense. Net Income is up by $6.
- On the statement of cash flow - net income flows onto the statement and then the sale of inventory unlocks cash flow in cash from operations so cash is up by $16.
- On the balance sheet - on the asset side of the balance sheet cash is up by $16 (for cash) and inventory is down by $10 since the inventory has been sold. Assets are up by $6. Net income then flows into retained earnings and shareholder's equity will be up by $6.
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Nothing, I imagine...haven't got time to think about it properly but off the top of my head if COGS and Revenue increase by $10, gross profit, expenses etc- everything below revenue and cogs- is exactly the same.
Seems like everything would stay the same below COGS in total form, but if you wanted to go for extra credit on this question, you could say gross profit %, NI % of sales, and EBITDA % of sales all go down because those totals stayed the same while sales increased.
whoops I mean if revenue increase by $20
Can't tell if you are trolling or not. This is like one of the first questions from the M&I guide if I remember correctly.
If revenue is up 20 and COGs are 10, operating income is up 10. Assuming no other changes, pre tax income is up 10 as well. Assuming a 30% tax rate, net income is up 7.
On your cash flow statement, start with NI up 7 dollars. Under cash flow from ops, you need to add back the 10 for COGs. You do this because WC is going down and that reduction in inventory is a source of cash. At the bottom of the statement, overall net change in cash is up 17.
On your BS, cash is up 17 but inventory is down 10. Overall assets are up 7. This balances out because NI is up 7 and rolls into retained earnings under shareholders equity.
This is exactly what you're looking for OP.
You would have some change within the assets section on the balance sheet, as in cash/receivables higher by 10 but inventory lower by 10, but other than that you have no change.
Accounting Questions (Statement Flow for Taxes, COGS, I/E and Accr. Liab) (Originally Posted: 08/09/2008)
Hey Everyone,
I am curious about some items and how they affect the 3 financial statements.
How do deferred taxes, COGS, accrued liabilities, and interest expense affect the 3 statements? Lets' assume an increase in these items by $10,000.
My assumption for interest expense is that for I/S:
EBT would decrease by $10,000 and NI would decrease by $6,000 assuming a 40% tax rate.
C/S: NI would decrease by $6,000 and the change in I/E is to add back $10,000...so an overall net change +$4,000
B/S: The flow leads to Cash rising $4,000, Interest Expense rising $10,000, and Retaining earnings decreasing by $6,000
Is that right? I wasn't sure whether I/E is considered operating.
Anyway I'm looking for help on the other items as well...
Thanks in advance.
If you are adding back interest expense on the cfs, you are implying that a payable account rose by 10k so it should appear on the bs...oh i see what you did. Expenses should not appear on the bs. I would have just assumed that the interest expense was paid in cash but i guess your answer is fine.
Oh wait I don't mean Interest Expense would rise for the B/S...I meant that Interest Payable would rise $10,000.
If so...is that right?
What about the other items: COGS, taxes, and accr liabilities?
...implies that you're trying to proxy cash flow from operations, rather than net cash flow.
Ok but if you add back 10,000 in I/E that would fall under cash from operating activities right? And since your NI dropped 6,000. You have a net change in operations cash of +4,000, right?
And this doesnt havent effect on Financing or Investing so would the net change in cash flow be +4,000?
Also can someone address how changes in Taxes, COGS, and Accr Liab affect the statements.
Thanks.
decarez- you generally use OP CF- capex as a proxy for free cash flow, so you would add back interest expense
Hm...
iambateman or Devils,
So are you all saying that adding back I/E to OP is correct?
Additionally, does that mean Interest Payable on the Balance Sheet increases by 10,000.
What about the other items I mentioned?
my apologies for the confusion, just reread what i typed and was wrong (hard to think on the wknds)...as interest expense IS cash in nature, you would subtract it from your CFFO and an increase in interest expense would reduce for FCF....as an example, if a company has to get an amendment on its term loan and its coupon is increased by the lenders as a result, this is a GOOD thing for holders of the TL (higher coupon=greater yield) but a bad thing for unsecured holders as there is less free cash flow for them (as interest expense increases) *fyi i build my CF statements beginning with EBITDA not net income so this may be different than how other people would look at it
COGS i think is a lot more straightfwd (assume increase in cogs is not due to increased revenues, just a lower gross profit margin and higher COGS as a % of sales) I/S- increase cogs which decreases EBIT net income etc B/S increase inventory decrease cash CF indirectly decreases as higher COGS leads to lower EBITDA (revenues held equal)
K so COGS increase in 10,000 would be:
I/S: EBIT decreases 10,000; NI reduced by 6,000
C/S: NI decreases by 6000
B/S: Cash decreases by 10,000, RE reduced by 6,000 and...Inventory increased by 4,000...
???
Ugh I'm getting a headache from accounting...
What about these?
It's my understanding that an increase in defered tax asset = a decrease in Cash flow, with a Tax liability having the inverse effect. So... for tax asset
I/S- No effect?
B/S- Decrease in cash based on future enacted tax rate, increase in tax asset based on the same future rate.
CF- Decrease in cashflow from (Operations?)
Ummmm, I might be missing something, but Interest expense does not show on the cash flow statement. So the only direct effect would be the Net Income. Dunno what you guys are talking about adding back interest to Cash flow statement
The cash flow form oper activities are NI+D&A and then you go down the current liabilities and assets on the balance sheet.
After that, it is investment activities and then financing. There is no place to add back interest expense. The net decrease in net income is the ONLY change to the Cash flow statement.
Salam,
You are right. We already rectified that issue.
This Thread is meaningless, use the damn search function.
http://modernyuppie.blogspot.com/ The musings and antics of a Meathead college wrestler turned asset backed securities trader.
http://modernyuppie.blogspot.com/ The musings and antics of a Meathead college wrestler turned asset backed securities trader. Dude who made you the judge of all things meaningful/meaningless?? WSO's search isn't the best on the planet and a lot of times it's just easier to get updated responses. If you think the thread is meaningless, move on.
salam i build my CF statements starting with EBITDA so i subtract interest expense to bridge to NI
cogs went up!?!? world ends
Assuming revenue up $20 and COGS up $10:
Revenue 100 COGS 50 Gross Profit 50 SG&A 20 Operating Income 30 Dep&Amort 5 Interest 10 Tax 5
Net Income 10
Revenue 120 COGS 60 Gross Profit 60 SG&A 20 Operating Income 40 Dep&Amort 5 Interest 10 Tax 6* Net Income 19
Net income up by $9, therefore Retained Earnings increases on Balance Sheet, also net income is used in Cash Flow Statement
*tax would increase as well - $6 here is an example
if this doesn't make sense to you, i think you should reconsider banking.
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