Financial Accounting Multi Step Questions Flashcards
Apple buys £100 worth or new iPad factories with debt. How are all three statements affected at the start of the year before anything else happens
IS: no changes yet
CFS: £100 down in cash flow from investing, but £100 up in cash flow from investing and so net 0 change
BS: £100 up in PPE and so assets up £100. Debt is also up £100 so liabilities also up £100
Apple spends £100 on debt buting new factories. Now looking at the year after (year 2) assume debt is high yield, so no principal is paid off and assume interest rate of 10%. Also assume factories depreciate at 10% per year. What happens
IS: operating income decreases by £10 fue to 10% depreciation, and the £10 interest expense decreases pre tax income to total of £20 down. Assuming tax rate of 40% net income is down £12
CFS: net income top line down £12. Since depreciation is non cash expense, add it back and so net cash flow from operations is down £2
BS: assets - cash is down £2 and PPE down £10 due to depreciation so net down £12 assets. Net income down £12 so shareholders equity also down £12 so balance
Apple example continued - now after year 2 all factories break down and value is written down to £0. Loan must also be payed back (which was £100). How do the statements change after here (year 2)
Since after 2 years the value of factories is now £80 after 2 years of depreciation of 10% we use this £80 to write down
IS: we have £10 of depreciation and then £80 of write down and also £10 of additional interest expense, so pre tax income is down £100. Net income down £60 assuming 40% tax rate
CFS: net income top line down £60. Write down and depreciation both non cash expenses so add them back £80 and £10 so up £30 net. Then cash flow from investing no change but cash flow from financing £100 down for loan payback so overall cash flow down £70
BS: cash down £70 and PPE down £90 (write down + depreciation) so assets down £160. Other side - debt down £100 since payed back and net income down £60 so shareholder equity down £60 so balances
Different - Assume apple orders £10 additional ipad inventory using cash. They order it but do not manufacture or sell anything yet
IS: no change since no COGS as only registered when good sold and manufactured
CFS: inventory is up £10 so cash flow from operations down by £10 so overall cash down £10
BS: inventory up £10 and cash down £10 so assets net 0
Now assume apple sells the ipads for £20 revenue at a cost of £10
IS: revenue up £20 and COGS up £10 so gross profit operating income and pre tax income are up £10. Assuming 40% tax rate net income is up £6
CFS: net income top line up £6. Inventory down £10 and since this is an asset cash fliw goes ul by £10 from this so cash flow from operations is up £16 and also net cash change up £16
BS: cash up £16 and inventory down £10 so assets are net £6 up. Other side - net income up £6 so shareholders equity up £6
Company raises £100 of debt at a 5% interest rate and 10% yearly principal repayment to purchase £100 of short term securities with 10% interest attached.
IS: no change
CFS: £100 purchase of short term securities is an asset so cash flow from investing down £100 and debt £100 makes cash flow from financing up £100 so net cash change is 0
BS: assets - short term securities up £100 and debt (liability) also up £100
Now what happens at end of year 1 after company raised £100 of debt for £100 of short term securities (which yield 10% yearly) at 5% interest and 10% annual principal repayment after company has gained interest, paid interest and paid back some principal debt
IS: interest income up £10 and interest expense up £5 so pre tax income increases by 5 and net income assuming 40% tax rate increases by £3
CFS: net income top line up £3. Cash flow from financing down £10 from repaying 10% debt so net cash down £7
BS: assets - cash down £7. Other side - debt down £10 and shareholder equity up £3 due to net income
Now after year 1 where company got £100 debt for £100 short term investments (which yield 10% annually) at 5% interest and 10% yearly debt repayment, the company sells the £100 of short term securities but gets a price of £110 for them. It uses proceeds to repay £90 of remaining debt
IS: record gain of £10 (110-100) so pre tax income up £10 and assuming 40% tax rate net income is up £6
CFS: net income top line up £6 but then subtract gain of £10 so cash flow from operations down £4. But then cash flow from investing up £110 so cash flow up 106 thus far. Then cash flow from investing down £90 from repaying rest of debt so therefore net cash flow up £16
BS: assets - cash up £16 but short term securities down £100 so net down £84. Other side - debt down £90 but shareholders equity up £6 due to net income increase £6
