Advanced Changes And Scenarios

Question 1

You own 70% of a company that generates Net Income of $10. Everything above Net Income on your Income Statement has already been consolidated.

Walk me through how you would recognize Net Income Attributable to Noncontrolling Interests, and how it affects the 3 statements.

Answer 1

IS: show a line for NI attributable for NCI, down 3
CFS: add back as its not a non cash expense. 0
BS: retained earnings down 3, NCI up 3

Question 2

You own 70% of a company that generates Net Income of $10. Everything above Net Income on your Income Statement has already been consolidated.
Walk me through how you would recognize Net Income Attributable to Noncontrolling Interests, and how it affects the 3 statements.
- now company issues dividends of 5

Answer 2

IS: dividends never show up on IS. Change 0
CFS: CFF down 5
BS: cash down 5, retained earnings down 5

Question 3

Now let’s take the opposite scenario and say that you own 30% of another company. The other company earns Net Income of $20. Walk me through the 3 statements after you record the portion of Net Income that’s you’re entitled to.

Answer 3

IS: create net income from EI line, increases NI by 6
CFS: subtract 6 back, so 0 change
BS: investments in equity interest up 6, retained earnings up 6

Question 4

Now let’s assume that this 30% owned company issues Dividends of $10. Taking into account the changes from the last question, walk me through the 3 statements again and explain what’s different now.

Answer 4

IS: net income still up 6
CFS: subtract 6, add 3 in CFO, cash up 3
BS: cash up 3, investments in equity interests up (6-3), retained earnings up 6.

Question 5

What if you now only own 10% of the company

Answer 5

When you own less than 20%, other company should be recorded as a security or ST investment, and only factor in dividends not NI.
- but practice may vary depending on level of influence company has over 10% owned company

Question 6

Walk me through what happens when you pay $20 in interest on Debt, with $10 in the form of cash interest and $10 in the form of Paid-in-Kind (PIK) interest

Answer 6

IS: net income down 12
CFS: add back PIK as its non cash, so down 2 in cash
BS: debt increases by 10 as PIK accrues to debt, NI down 12 and cash down 2.

Question 7

Due to a high issuance of Stock-Based Compensation and a fluctuating stock price, a company has recorded a significant amount of Tax Benefits from Stock-Based Compensation and Excess Tax Benefits from Stock-Based Compensation.

Assume that it records $100 in Tax Benefits from SBC, with $40 of Excess Tax Benefits from SBC, and walk me through the 3 statements. Ignore the original Stock-Based Compensation issuance.

Answer 7

IS: no changes
CFS: add 100 in SBC to CFO to accrue to APIC, subtract out 40 to add to CFF. Cash up 100
BS: cash up 100, common stock and APIC up 100

Question 8

A company records Book Depreciation of $10 per year for 3 years. On its Tax financial statements, it records Depreciation of $15 in year 1, $10 in year 2, and $5 in year 3.

Walk me through what happens on the BOOK financial statements in Year 1.

Answer 8

Book IS: pre tax income falls by 10, NI falls by 6 - tax of 4
Tax IS: net income falls by 9 - tax of 6
Book CFS: add back 10, and add back 2 worth of DT, representing that cash taxes were lower than book values. Cash up 6
BS: cash up 6, PPE down 10, NI down 6, DTL up by 2

DTL represents the amount of tax company has saved by following book depreciation.

Question 9

A company records Book Depreciation of $10 per year for 3 years. On its Tax financial statements, it records Depreciation of $15 in year 1, $10 in year 2, and $5 in year 3.

Walk me through what happens on the BOOK financial statements in Year 2

Answer 9

IS: NI falls by 6
CFS: add back 10, cash up 4
BS: cash up 4, PPE down 10, NI down 6.

Question 10

A company records Book Depreciation of $10 per year for 3 years. On its Tax financial statements, it records Depreciation of $15 in year 1, $10 in year 2, and $5 in year 3.

Walk me through what happens on the BOOK financial statements in Year 3

Answer 10

Book IS: NI falls by 6
Tax IS: NI falls by 3. Taxes fell by 2 more on the tax IS
CFS: add back 10, subtract 2 worth additional cash taxes, paying extra to make catch up payments, cash up 2
BS: cash up 2, PE down 10, NI down 6, DTL fall by 2

Question 11

A company you’re analyzing records a Goodwill Impairment of $100. However, this Goodwill Impairment is NOT deductible for cash tax purposes.

Walk me through how the 3 statements change.

Answer 11

Book IS: NI falls by 60
Tax IS: NI remains the same, so cash taxes 40 higher than book taxes
CFS: NI down 60, but add back 100. Subtract 40 from deferred taxes, meaning we’ll save some cash from reduced book income taxes in future. Cash change 0
BS: goodwill down 100, DTL down 40, NI down 60

Question 12

How can you tell whether or not a Goodwill Impairment will be tax- deductible?

Answer 12

No way to know for sure unless company states it, but generally impairment is not deductible
- if it were, companies have incentive to write down and save on taxes from non-cash charges

Question 13

A company has Net Operating Losses (NOLs) of $100 included in the Deferred Tax Asset (DTA) line item on its Balance Sheet because it has been unprofitable up until this point.

the company finally turns a profit and has Pre-Tax Income of $200 this year. Walk me through the 3 statements and assume that the NOLs can be used as a direct tax deduction on the financial statements

Answer 13

IS: pre tax income falls by 100, NI falls by 60
CFS: NI down 60, but company hasn’t really lost anything, just saved on taxes, so add back NOLs and label deferred taxes, cash up 40
BS: cash up 40, DTA down 100, NI down 60

Question 14

The company has earned revenue of $1000 and EBITDA of $200 from January 1 to December 31, 2050. From January 1 to March 31, 2050, it earned revenue of $200 and EBITDA of $50. From January 1 to March 31, 2051, it earned revenue of $300 and EBITDA of $75.

What are company’s revenue and EBITDA for the TTM as of march 31 2051?

Answer 14

EBITDA = 225
Revenue = 1100

Question 15

A company acquires another company for $1000 using 50% stock and 50% cash.

Assets of $1000 and Liabilities of $800.

Using that information, combine the companies’ financial statements and walk me through what the Balance Sheet looks like IMMEDIATELY after the acquisition.

Answer 15

Used 500 cash, 500 stock, assets worth 1000, liabilities 800, equity 200 but wiped out
- assets up 500
- other side up 1300, due to liabilities and stock issuance
- need goodwill of 800, now Bala cède.

Question 16

You’re analyzing a company with $100 in Short-Term Investments on its Balance Sheet. These Investments are classified as Available-for-Sale (AFS) Securities.

The market value for these securities increases to $110. Walk me through what happens on the 3 statements.

Answer 16

IS: AFS securities, so do not report unrealised gains and losses, no changes.
CFS: no changes because no cash accounts change
BS: ST investments line up by 10, AOCI up by 10

Question 17

Now let’s say that these were classified as Trading Securities instead – walk me through the 3 statements after their value increases by $10.

Answer 17

IS: NI up by 6
CFS: unrealised so subtract 10, cash down 4
BS: cash down 4, ST investments up 10, NI up 6

Intuition here is that we’ve paid taxes on a non-cash source of income, so cash is down, but paper value of our assets has risen.