How would you answer a question like this: walk me through the three financial statements when a company acquires another company for 50% cash 50% debt. I know this is a merger model type question, but how would this work theoretically.
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Assuming timepoint zero and interest is not in effect:
1) Zero change on the income statement --> reconciled cash flow statement 2) Investing cash outflow of 100% (company purchase price), 50% financing cash inflow (debt used) --> Balance Sheet 3) Cash goes down 50%, Asset Account goes up 100% (you own the company now), Accounts Payable goes up 50% 4) Zero net change on balance sheet = zero change on IS, which flows to statement of retained earnings
That's ignoring goodwill, but for an SA position I doubt they'd ask for that
"Accounts Payable goes up 50%" -- do you mean Long term debt?
Also for clarity I'd replace the 100%'s and 50%'s with $100 and $50, and preface the response by saying "assuming the acquisition price is $100..." and go from there.
Mentioning that you'd record the acquired assets and liabilities based on a purchase price allocation, including valuations of identifiable intangible assets and goodwill, definitely can't hurt.
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Perfect, exactly what I was looking for. Thanks my man, much appreciated
Just lumped the debt into AP, so ya same thing. But I wouldn't mention intangibles or goodwill, because then that opens the door for them to ask you to run that through the 3 statements. From my interview experience last fall with accounting questions, I tried to answer as simple as possible and let them dig deeper. I had friends who got wrecked on valuation questions where they responded with "debt" instead of "capital structure" and then the interviewer was like "oh so you know about debt?" and just dove into it. So word choice definitely matters
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