All,
Can you help me with the following questions?
What are the effects on the 3 financial statements when the following happens?
A) A company reduces its accounts receivables reserve ratio.
B) A company begins to capitalize R&D expenses.
C) Why would a company do these things?
Thanks for the help!
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A. No IS effect. On CFS, AR down, cash up. On BS, cash up, AR down. - to generate higher cash flow?
B. On IS, expense down, net income up by R&D(1-t). On CFS, NI up, CFI up, cash down by R&D(1-t). On BS, cash down, intangible up, RE up. - Not sure if this allowed in the US, but by doing this, you can inflate your earnings.
Why:
You don't generate much benefit for holding on to AR a long time - it is in your best interest to have shorter credit terms in order to reduce the risk of not collecting and to improve your cash flows.
As an accountant/auditor, I enterpret the statement to be "what is a circumstance according to financial reporting standards that allows a company to capitalize R&D?" You would capitalize R&D, when you are close to or finished a new technology / patented product.
HELP! Interview Modeling/Financial Statement Test (Originally Posted: 11/17/2017)
Hey all,
So I have a final round interview for a first year IB analyst position coming up next week, and part of the interview is a financial statement test and modeling test that encompasses an hour of time. Anybody have any experience with these or have any ideas what they would ask given that its for an entry position and its going to take an hour of time? If anybody has any practice examples of these it would be much appreciated. As always thanks guys.
Thanks
I would expect either an advanced excel test that tests your abilities with excel or just straight up projecting the financial statements. Had a first year ib interview modeling test which consisted of both 1 hour a piece. PM me if you want.
Interview Question - Financial statements question (Originally Posted: 02/08/2011)
How would you properly answer:
A company buys a $10mm asset, financed with 50% equity and 50% debt; how does it flow through the financial statements.
Now what if we consider a 10% interest rate and a 40% tax rate. Show how it flows through the financial statements.
SB awarded!
What kind of asset is it? Current asset or PP&E? If PP&E what's the depreciation schedule?
Steelo, it's PP&E and 3 years.
Thanks.
Immediately: Income statement - no effect Cash flow - Down $10 from investing activities Balance sheet - Cash down $10, PP&E up $10, so overall assets no change. No other changes so the two sides balance
After one year: Income statement - Depreciation expense will cause operating income to fall $3.33m. Assuming 40% tax rate then that's a decrease of $2m of net income Cash flow statement - Net income down $2m but we add back depreciation. Overall cash is up $1.33m Balance sheet - Cash is up $1.33m, but PP&E down $3.33m due to depreciation. Overall assets down $2m. On the other side our net income was down $2m so that flows into shareholder's equity. Both sides balance
When thinking through these problems, try to do it in the order I did. Then if you end up having your BS balance then you know you did everything correctly
Wrong- Its financed with 50% debt so it changes more than jsut hte assets...
My bad - completely forgot about that
Immediately: Income statement - no effect Cash flow - Down $10m from investing activities, up $10m from financing activities ($5m equity + $5m debt), so overall no change in cash Balance sheet - No change in cash, PP&E up $10m, so overall assets up $10m. Also have $5m more in liabilities and $5m more in shareholder's equity, so other side is up $10m as well. Both sides balance.
After one year: Income statement - Depreciation expense will cause operating income to fall $3.33m. Interest expense of 0.1*5= 0.5. Assuming 40% tax rate then that's a decrease of $2.3m of net income. Cash flow statement - Net income down $2.3m but we add back depreciation. Overall cash is up $1.03m Balance sheet - Cash is up $1.03m and PP&E down $3.33m due to depreciation. Overall assets down $2.3m. On the other side our net income was down $2.3m so that flows into shareholder's equity. Both sides balance
wat no
income statement in yr 1 would add 3.83m to OpEx tax effected equals a decrease of approx 2.3m not 5m
Awesome! Thank you so much Steelo!
why is equity going down if you are using it to purchase half the asset?
Steelo's math is incorrect and he is assuming new equity...be prepared to treat it as 50 debt/50 cash...
In that case (assuming no debt amort...
at T zero no change in IS,
CFI: Down 10 for purchase, CFF up 5 for the loan (source) so net change in cash = -5.
BS: Assets : PPE +10, Cash -5 , net= +5 Liabilities: +5 for the loan SE: unch
T1: IS: pre-tax inc -3.3 for dep + -.5 int exp = -3.8 1.52 in taxes = NI ~ -2.3 CF: CFO -2.3 + Dep 3.3 = +1 CFI: - CFF: - = net change in cash +1 BS: Cash +1, PPE - 3.3 = Assets -2.3 Liabilities unchanged since we didn't pay back any of the loan SE: -2.3 (NI change flows here)
Balanced.
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