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If Depreciation is a non-cash expenses, why does it affect the cash balance?
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If Depreciation is a non-cash expenses, why does it affect the cash balance?
Although depreciation, is a non-cash expense, it is tax-deductible. Since taxes are cash expense, Depreciation affects cash by reducing the amount of taxes you pay
Why adjustments do you need to make for minority ownership?
Need to add it back to Enterprise Value, as according to accounting laws if you own a majority ownership then you need to add 100% of the company to the balance sheet and income statement. Hence, based on apples to apples comparison for multiples, you would need to add it to the Enterprise value (numerator) so that both would reflect the minority interest.
What happens when Accrued Compensation goes up by $10
First confirm if the accrued compensation is now being recognised as an expense (as opposed to just changing non-accrued to accrued compensation) *nonacrrued means accrued comepnsation that a company has incurred that will be paid back more than 12 months in the future

Assuming that is the case, operating expenses on the income statement go up by $10, Pre-tax income falls $10, and Net Income falls by $6 (assuming 40% tax rate)

On the cash flow statement, net income is down $6 and Accrued compensation will increase cash flow by $10, so overall Cash Flow from Operations is up by $4 and the Net Change in Cash at the bottom is up by $4.

On the Balance Sheet, Cash is up by $4 as a result, so Assets are up by $4. On the Liabilities & Equity side, Accrued Compensation is a liability so liabilities are up $10 and Retained Earnings are down by $6 due to the Net Income, so both sides balance
What happens when Inventory goes up by $10, assuming you pay for it with cash?
No changes to the income statement

On the Cash Flow Statement, Inventory is an asset so that decreases your Cash FLow from Operations - it goes down by $10, as does the Net Change in Cash at the bototm

On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the changes cancel out and Assets still equals Liabilities & Shareholders' Equity
Why is the Income Statement not affected by changes in Inventory?
In the case of inventory, expenses is only recorded when the goods associated with it are sold - so if it's just sitting in a warehouse, it does not count as COGs or Operating Expense until company manufactures it into a product and sells it.
What goes under financing and investing cash flow
Investing
- purchase/sale of long-term assets (capex)
- purchase/sale of other businesses (M&A)
- Purchase sale of marketable securities (i.e. stocks and bonds)

Financing:
Cash flow from financing activities is a section of a company's cash flow statement, which shows the net flows of cash that are used to fund the company.

- Issue/Repurchase Equity
- Issue/Repurchase Debt
- Dividend Payments and Other Items
At the start of Year 3, the factories all break down and the value of the equipment is written down to $0. The loan must also be paid back now. Walk me through the 3 statements.
- Write downs show up on the income statement (pre-tax income line)

Cash flow - it is a non-cash expense so add it back

Cash flow from financing - there is a $100 charge for loan payback. So it falls by $100

Overall cash falls by $68

Balance sheet - debt is down $100, and since Net Income was down $48, SE down $48 as well

Altogether, L&SE are down $148
Could you ever end up with negative shareholders' equity? What does it mean?
Yes. It is common to see this in 2 scenarios:

1. Leveraged buyouys with dividend recapitalisations - it means that the owner of the company has taken out a large portion of its equity (usually in the form of cash), which can sometimes turn the number negative
2. It can also happen if the company has been losing money consistently and therefore has a declining Retained Earning balance, which is a portion of Shareholders' equity

It doesn't "mean" anything in particular, but it can be a cause for concern and possibly demonstrate that the company is struggling (in the second scenario). Note: Shareholders' equity never turns negative immediately after an LBO - it would only happen following a dividend recap or continued net losses.
What is working capital?
current assets - current liabilities

If it's positive, it means a company can pay off its short-term liabilities with its shortterm assets. It is often presented as a financial metric and its magnitude and sign (negative or positive) tells you whether or not the company is "sound."

Bankers look at Operating Working Capital more commonly in models, and that is defined as (Current Assets - Cash & Cash Equivalents) - (Current Liabilities - Debt).
What does negative Working Capital mean? Is that a bad sign?
1. Some companies with subscriptions or longer-term contracts often have negative Working Capital because of high Deferred Revenue balances.

2. Retail and restaurant companies like Amazon, Wal-Mart, and McDonald's often have negative Working Capital because customers pay upfront - so they can use the cash generated to pay off their Accounts Payable rather than keeping a large cash balance on-hand. This can be a sign of business efficiency.

3. In other cases, negative Working Capital could point to financial trouble or possible bankruptcy (for example, when customers don't pay quickly and upfront and the company is carrying a high debt balance).
Walk me through a $100 bailout of a company and how it affects the 3 statementsFirst, confirm what type of "bailout" this is - Debt? Equity? A combination? The most common scenario here is an equity investment from the government, so here's what happens: No changes to the Income Statement. On the Cash Flow Statement, Cash Flow from Financing goes up by $100 to reflect the government's investment, so the Net Change in Cash is up by $100. On the Balance Sheet, Cash is up by $100 so Assets are up by $100;Walk me through a $100 "bailout" of a company and how it affects the 3 statements.First, confirm what type of "bailout" this is - Debt? Equity? A combination? The most common scenario here is an equity investment from the government, so here's what happens: No changes to the Income Statement. On the Cash Flow Statement, Cash Flow from Financing goes up by $100 to reflect the government's investment, so the Net Change in Cash is up by $100. On the Balance Sheet, Cash is up by $100 so Assets are up by $100; on the other side, Shareholders' 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 3 statements.This is counter-intuitive. When a liability is written down you record it as a gain on the Income Statement (with an asset write-down, it's a loss) - so Pre-Tax Income goes up by $100 due to this write-down. Assuming a 40% tax rate, Net Income is up by $60. On the Cash Flow Statement, Net Income is up by $60, but we need to subtract that debt write-down - so Cash Flow from Operations is down by $40, and Net Change in Cash is down by $40. On the Balance Sheet, Cash is down by $40 so Assets are down by $40. On the other side, Debt is down by $100 but Shareholders' Equity is up by $60 because the Net Income was up by $60 - so Liabilities & Shareholders' Equity is down by $40 and it balances. If this seems strange to you, you're not alone - see this Forbes article for more on why writing down debt actually benefits companies accounting-wise:When would a company collect cash from a customer and not record it as revenue?Three examples come to mind: 1. Web-based subscription software. 2. Cell phone carriers that sell annual contracts. 3. Magazine publishers that sell subscriptions. Companies that agree to services in the future often collect cash upfront to ensure stable revenue - this makes investors happy as well since they can better predict a company's performance. Per the rules of GAAP (Generally Accepted Accounting Principles), you only record revenue when you actually perform the services - so the company would not record everything as revenue right away.What is the difference between cash-based and accrual accountingCash-based accounting recognizes revenue and expenses when cash is actually received or paid out; accrual accounting recognizes revenue when collection is reasonably certain (i.e. after a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in cash. Most large companies use accrual accounting because paying with credit cards and lines of credit is so prevalent these days; very small businesses may use cash-based accounting to simplify their financial statements.A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?Several possibilities: 1. The company is spending too much on Capital Expenditures - these are not reflected at all in EBITDA, but it could still be cash-flow negative. 2. The company has high interest expense and is no longer able to afford its debt. 3. The company's debt all matures on one date and it is unable to refinance it due to a "credit crunch" - and it runs out of cash completely when paying back the debt. 4. It has significant one-time charges (from litigation, for example) and those are high enough to bankrupt the company. Remember, EBITDA excludes investment in (and depreciation of) long-term assets, interest and one-time charges - and all of these could end up bankrupting the company.32. Normally Goodwill remains constant on the Balance Sheet - why would it be impaired and what does Goodwill Impairment mean?Usually this happens when a company has been acquired and the acquirer re-assesses its intangible assets (such as customers, brand, and intellectual property) and finds that they are worth significantly less than they originally thought. It often happens in acquisitions where the buyer "overpaid" for the seller and can result in a large net loss on the Income Statement (see: eBay/Skype). It can also happen when a company discontinues part of its operations and must impair the associated goodwill.Under what circumstances would Goodwill increase?Technically Goodwill can increase if the company re-assesses its value and finds that it is worth more, but that is rare. What usually happens is 1 of 2 scenarios: 1. The company gets acquired or bought out and Goodwill changes as a result, since it's an accounting "plug" for the purchase price in an acquisition 2. 2. The company acquires another company and pays more than what its assets are worth - this is then reflected in the Goodwill number.When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?Enterprise Value, because that's how much an acquirer really "pays" and includes the often mandatory debt repayment.What's the formula for Enterprise Value?V = Equity Value + Debt + Preferred Stock + Minority Interest - Cash (This formula does not tell the whole story and can get more complex - see the Advanced Questions. Most of the time you can get away with stating this formula in an interview, though).How do you calculate filly diluted securities?Take the basic share count and add in the dilutive effect of stock options and any other dilutive securities, such as warrants, convertible debt or convertible preferred stock. To calculate the dilutive effect of options, you use the Treasury Stock Method (detail on this below).How do you calculate filly diluted securities?