Module 1 Accounting

Question 1

IRR

Answer 1

Estimates potential returns using an upfront investment or ‘asking price’ AND series of cash flows.

It should exceed the opportunity cost of investing in something else

Question 2

Walk me through the financial statements when a company’s Operating Expenses increase
by $100

Answer 2

IS: ^ of 100 in Operating Expenses, Operating income decrease of -100 and therefore pre-tax of -100 as well.

CF: Operating activities decreases by -60, so Total cash changes at bottom are down by -60

BS: A - Cash is down by -60, so Assets is down by -60 SE: Decreased by -60

Question 3

A company’s Depreciation increases by $20.

Answer 3

IS: pre-tax income falls by -20, net income falls by -12 assuming a 40% tax rate

CF: O - Net income decreases by -12, but you add depreciation back since its non-cash, this creates a net cash change at the bottom of 8

BS: A - Cash increases by 8. PPE decreases by -20 due to depreciation, so the asset side is down by -12. L&E is also down by -12 due to decrease in net income, so both sides balance

Intuition: This non-cash expense does not “cost” the company anything, but it reduces
the company’s taxes.

Question 4

A company runs into financial distress and needs Cash immediately. It sells a factory that’s listed at $100 on its Balance Sheet for $80. What happens to the statements?

Answer 4

IS: You record a $20 loss on, which reduces pre-tax income by -20, and a net income by -15 (25% income rate)

CF: Net income Is down by -15, the $20 loss is added back into PPE, which brings your total change in CFO Operations to 5. You also show the proceeds received, $80 on CF from investing, So cash at the bottom is up by $ 85.

BS: Cash is increased by $85, PPE is down by -100, so Assets are down total of -15. SE: falls by -15 due to net income decrease, so both sides balance.

Question 5

Walk me through each statement

Question 6

What does each statement measure?

Question 7

Where does Net Income go beyond the I/S?

Question 8

Which statement is ‘most important’?

Question 9

What accounts for the change in PPE?

Question 10

What is the impact if Depreciation changes?

Question 11

Walk me through a change in depreciation

Question 12

What is DTL? What does a DTL tell us and how does it change the three financial statements?

Answer 12

It’s a temporary difference between Book and tax income
(can be used for receiving deductions faster)

Income tax Expense 100
Income Tax Payable 80
DTL 20

Question 13

What is DTL? What does a DTL tell us and how does it change the three financial statements?

Answer 13

It’s a temporary difference between Book and tax income
(can be used for receiving deductions faster)
Income tax Expense

Question 14

what is DTA? What are some situations in which this would be created? How does it affect the three statements?

Answer 14

An increase in taxes saved in FUTURE years, due to a temporary tax difference

Income Tax expense 80
(DTA) 20
Income Tax Payable. 100