Impact of Purchasing an Asset on the Financial Statements?
I have an interview tomorrow and am trying to prepare. One question I have been asked a lot is the impact on financial statements from purchasing an asset. How is my answer?
My Answer
1. There will be a debit in profit and loss account in the name of Depreciation ( long term capital asset)
2. There will be Asset created on the Asset side of balance sheet under the head long term/short term asset as the case may be
3. In cash flow statement the amount spent on purchase of asset will be recorded in Investing Activities with the name of the Asset.
I wouldn’t say that’s wrong but you could add a bit more color and rearrange how you present it. For example, I would start by saying the asset will appear on the balance sheet (you can say it’s debited etc for each transaction but I don’t particularly think that’s necessary) and there is a corresponding decrease in cash. Nothing on the other side of the balance sheet. That decrease in cash then shows up on the cash flow statement in the investment section, which leads to a net decrease in cash. No immediate changes on the income statement. Then, once depreciation hits, it will show up on the income statement as a cost, reduces net income. That flows to cash flow statement where you add back depreciation, then the final cash amount flows to the Bs
Hmm, I would go about it by first asking whether or not it was purchased with cash or debt.
Then you can know how it affects your BS more accurately - either it reduces the cash balance or it increases your long or short-term debt balance on the liabilities side.
Also, I don't think you'd mention depreciation unless they're asking about the effects on the financial statements after the initial purchase, or in other words, you aren't going to see an effect on depreciation on the date of purchase let's say. One last touch would be to mention that it (depending on the asset, if machinery for example) increases your PPE account in particular.
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