Accounting

Question 1

Different ways to fund

Answer 1

Debt & Equity
1. Debt is initially cheaper for most of the company. Need to be able to pay interest expense and principal payments
2. Both are not shown in IS initially, and they boost the company’s cash balance
3. With equity, share gets diluted. Issue dividends or repurchase stock. Not shown in IS. CFS: issue dividends or repurchase common shares
4. With debt: pay interest will be recorded on IS, reducing its net income and cash.

Question 2

Write down 100, 3 statements

Answer 2

1. write down is not cash tax deductible, will cause deferred tax.
2. IS: PPE write down -100, NI -80 CFS: NI:-80, write down is non cash adjustment +100, deferred income tax -20 BS: PPE:-100 DTA:20 RE:-80

Question 3

Why record goodwill & other intangible assets

Answer 3

1. Reconcile the balance sheet
2. In real life, acquirers almost always pay premiums for target companies
3. In an acquisition, you write down the seller’s CSE and then combine its assets and liabilities with those of the acquirer

Question 4

Goodwill

Question 5

What’s the difference between deferred tax assets and deferred tax liabilities, and how are NOL related to both of them

Answer 5

1. Both DTA and DTL relate to temporary difference between the book basis and the tax basis of assets and liabilities.
2. DTA - potential future cash-tax savings; DTL: additional cash-tax payments
3. DTL arise because of different depreciation methods, such as when companies accelerate depreciation for tax purposes, reducing their tax burden in the near term but increasing it in the future.
4. • DTA may arise when the company loses money ( negative pre-Tax income) in the current period
   • DTA may create when the company deducts an expense for book-tax purposes but cannot deduct it for cash-tax purposes (i.e. SBC, PPE write down)

Question 6

What are some items that are deductible for book-tax but not cash-tax purposes, and how do they affect the deferred tax line items?

Answer 6

• SBC, Amortization of Intangibles, Goodwill and PPE write down
• deferred tax line on the CFS will show a negative, while DTA will increase

Question 7

Zelda a factory that’s listed at 100 on its balance sheet for 80. 3 statements

Answer 7

1. Income statement: loss -20, decrease pre-tax income by 20, apply 25% tax, NI goes down by 15
2. CFS: NI goes down by 15, loss as a non cash adjustment +20, CFI:+80. Change of cash up by 85
3. BS: cash up by 85, PPE goes down by 100, RE goes down by 15

Question 8

A company decides to change a key employee’s compensation by offering the employee stock options instead of a cash salary. The employee’s cash salary was 100, but she will receive 120 in stock options now. How do the statements change?

Answer 8

1. IS: operating expenses up 20, pre-tax income down by 20, apply 25% tax rate, NI goes down by 15
2. CFS: NI goes down by 15, SBC is a non cash adjustment, add 120, deferred tax income goes down by 30. Change of net cash is +75
3. BS: cash up 75, deferred tax asset up 30, on the asset part up 105. L&E side: RE down by 15, SBC up 120, total 105

Question 9

Walmart buys 400 in inventory for products products it will sell next month. Walk me through what happens on the statements when they first buy the inventory, and then when they sell the products for $600. Combined with first step.

Answer 9

1.
- is: no change
- CFS: inventory -400 NI -400
-BS: cash -400 inventory + 400

2. -IS: PTI:200 NI: 150
   -CFS NI: 150
   -BS: Cash :150 RE 150

Question 10

AR

Answer 10

If AR increases, it means we’ve delivered a product or service and are waiting for the cash. So, we record revenue on the income statement

If AR decrease, it means we’ve collected cash but haven’t delivered anything, so this change won’t show up on the IS, but others