Accounting Basic Flashcards
- sell the iPods for revenue of $20, at a cost of $10. Walk me
through the 3 statements under this scenario.
IS: Revenue up 20, COGS up 10, Gross profit up 10, Operating Income up 10, after 40%, Net Income up 6.
CFS: Net Income up 6, Inventory decrease by 10 as we just manufactured the inventory into ipods, so CF from Operating is up by 16.
BS:
- Asset side:Cash is up by 16, Inventory down by 10, asset up by 6.
- Income statement also up by 6.
- Could you end up with negative shareholders’ equity? What does it mean?
Yes.Normally in 2 scenarios:
- LBO with dividend recapitalisation - meaning owners of the company has taken out a large portion of its equity (in the form of cash)
- Can also happen when company has been losing money consistently and therefore has a declining Retained Earnings balance, a portion of shareholders’ equity.
- What is working capital? How is it used?
Working Capital = Current Assets - Current Liabilities
If it’s positive, it means a company can pay off its short-term liabilities with its short term assets. A metric to define whether or not the company is sound.
18.1. What is Operating Working Capital?(Bankers look at this more)
(Current Asset - Cash & Cash equivalents) - (Current Liabilities - Debt)
- What does negative working capital mean? Is that a bad sign? What are the three common situation?
Not necessarily, depends on the type of company and specific situation.
- Some companies with subscriptions or long-term contracts, -ve WC bc high deferred revenue balances
- Retail and retaurant companies like Amazon, Walmart, McDonald’s often have -ve working capital bc customers pay upfront, so they use cash generated to pay off accounts payable rather than keeping a large cash balance, it’s a sign of business efficiency.
- Also, it can be a bad thing, point to financial trouble, and possible bankruptcy.
- Walk me through a $100 ‘‘Bailout’’ of a company and how it affects the 3 statements?
First, find out what type of bailout, debt or equity? most common one is an equity investment from the government
IS: No changes
CFS: Cash flow increase by 100, net change in cash up by 100
BS: cash up by 100, asset up by 100, equity would go up by 100 to make it balance
- Walk me through a $100 write-down of debt - as in owed debt, a liability - on a company’s balance sheet and how it affects the statements?
IS: income up by 100, assume 40% tax, net income up by 60
CFS: Net income up by 60, subtract the debt write-down which is 100, so net change is -40.
BS: cash is down 40, so asset down for 40, on the other side, debt is down by 100 but shareholders’ equity is up by 60. so balanced
22.1 When a liability is written down and when an asset write-down, which one is gain on income statement, which is loss?
Liability write-down is a gain on IS, asset is a loss.
- Difference between accounts receivable and deferred revenue
accounts receivable has not been paid, deferred revenue has been.
The former is waiting for the money, the latter is waiting to record as revenue.
- Differences between cash-based and accrual accounting?
- cash-based recognizes revenue/expenses when cash is changed
- accrual recognises revenue when collection is reasonably certain, or when transaction happened
- A company has had positive EBITDA for the past 10 year, but it recently went bankrupt, how could this happen?
- Cash flow-wise, too much Capex, not reflected in EBITDA, but negative cash-flow.
- High interest expense, no longer able to afford its debt
- debt all matures on one date, unable to refinance it due to a credit crunch, run out of cash completely by paying debt
- significant one-time charges(litigation)
- Goodwill normally remains constant on the BS, why would it be impaired and what does Goodwill Impairment mean?
Normally happens when a company has been acquired, and the acquirer reassess the company’s goodwill.
Company discontinue parts of its service, impair the associated goodwill.
