Investment Banking technical interview questions and answers
Now the company must writedown the value of the equipment down to $0. At the beginning of Year 3, the equipment is on the books at $80 after one year’s depreciation. Further, the company must pay back the entire loan. Income statement: The $80 writedown causes net income to decline $48. There is no further depreciation expense and no interest expense. Cash Flow Statement: Net income down $48 but the writedown is non-cash so add $80. Cash flow from financing decreases $100 when we pay back the loan. Net cash is down $68. Balance Sheet: Cash (asset) down $68, PP&E (asset) down $80, Debt (liability) down $100 and Retained Earnings (shareholders’ equity) down $48. Left side of the balance sheet is down $148 and right side is down $148 and we’re good!
First Year: Income Statement: No depreciation and no interest expense so no change. Cash Flow Statement: No change to net income so no change to cash flow from operations. Just like the previous question, we’ve got a $100 increase in capex so there is a $100 use of cash in cash flow from investing activities. Now, however, in our cash flows from financing section, we’ve got an increase in debt of $100 (source of cash). Net effect is no change to cash. Balance Sheet: No change to cash (asset), PP&E (asset) up $100 and debt (liability) up $100 so we balance.
Second Year: Same depreciation and tax assumptions as previously. Let’s also assume a 10% interest rate on the debt and no debt amortization. Income Statement: Just like the previous question: $20 of depreciation but now we also have $10 of interest expense. Net result is a $18 reduction to net income ($30 x (1 – 40%)). Cash Flow Statement: Net income down $18 and depreciation up $20. No change to cash flow from investing or financing activities (if we assumed some debt amortization, we would have a use of cash in financing activities). Net effect is cash up $2. Balance Sheet: Cash (asset) up $2 and PP&E (asset) down $20 so left side of balance sheet down $18. Retained earnings (shareholders’ equity) down $18 and voila, we are balanced.
First Year: Let’s assume that the company’s fiscal year ends Dec. 31. The relevance of the purchase date is that we will assume no depreciation the first year. Income Statement: A purchase of equipment is considered a capital expenditure which does not impact earnings. Further, since we are assuming no depreciation, there is no impact to net income, thus no impact to the income statement. Cash Flow Statement: No change to net income so no change to cash flow from operations. However we’ve got a $100 increase in capex so there is a $100 use of cash in cash flow from investing activities. No change in cash flow from financing (since this is a cash purchase) so the net effect is a use of cash of $100. Balance Sheet: Cash (asset) down $100 and PP&E (asset) up $100 so no net change to the left side of the balance sheet and no change to the right side. We are balanced.
Second Year: Here let’s assume straightline depreciation over 5 years and a 40% tax rate. Income Statement: Just like the previous question: $20 of depreciation, which results in a $12 reduction to net income. Cash Flow Statement: Net income down $12 and depreciation up $20. No change to cash flow from investing or financing activities. Net effect is cash up $8. Balance Sheet: Cash (asset) up $8 and PP&E (asset) down $20 so left side of balance sheet doen $12. Retained earnings (shareholders’ equity) down $12 and again, we are balanced.
Varieties of this question are some of the most common technical question asked in interviews today. This type of question attempts to test your understanding of how the three financial statements (income statement, balance sheet, cash flow statement) fit together. The most common variation of this question is how does $10 of depreciation affect the three financial statements (answered below). I’ve posted a few additional examples as well.kass management pain management specialist tiger global management property management fresno morgan stanley wealth management vaccination administration management system utilization management ncb management services device management android digital asset management elite property management republic waste management wealth management near me master data management memory management blue screen desk cable management pmi property management marketing management risk management framework defining risk management what is supply chain management millennium management management consultant salary waste management mn property management company near me management concepts property rental management waste management colorado north american medical management personal management merit badge logistics management resource property management total property management time management tips reliant property management what is change management pain management clinic ubisoft account management wastw management cardinal management zrs management american property management waste management reno waate management realpage utility management watse management harbor group management asana project management comprehensive pain management waste management pickup schedule 2021 database management which resource management task includes activating local resource requirements, if available? stop code memory management vulnerability management system melvin capital management healthcare management salary facts management login solid waste management commercial property management waste management services supply chain management jobs online management forest management meridian property management what is management google project management contingency management square enix account management enterprise management incentive event management novad management consulting healthcare management jobs greystar management applied economics and management missoula property management bridge property management best project management software thunderbird school of global management waste management phoenix open earned value management general management construction management salary pain management doctors near me that prescribe narcotics companies management business process management capital management anger management near me management analyst campbell property management magnolia management define management cornerstone property management