Investment Banking Advanced Accounting Questions 2023 Update A+/Investment Banking Advanced Accounting Questions

How is GAAP accounting different from tax accounting? - ANS-1. GAAP is accrualbased but tax is cash based 2. GAAP uses straight-line depreciation or a few other methods whereas tax accounting is different (accelerate depreciation) 3. GAAP is more complex What are deferred tax assets/liabilities and how do they arise? - ANS-Arise because of temporary differences between what a company can deduct for cash tax purposes and what they can deduct for book tax purposes. Deferred tax liabilities: tax expense on the income tax but the tax has not been paid in cash yet Deferred tax assets: taxes have been paid in cash but have not been expensed on the income statement yet Most commonly arise with asset write-ups and write-downs in M&A deals -- asset writeup will produce a deferred tax liability and write-down will produce a deferred tax asset Walk me through how you create a revenue model for a company. - ANS-Bottoms-up: start with individual products/customers, estimate the average sale value or customer value, and then the growth rate in sales and sale values to tie everything together Tops-down: start with the "big picture" metrics like overall market size, then estimate the company's market share and how that will change in coming years, and multiply to get their revenue. Difficult because estimating "big picture" numbers is almost impossible Walk me through how you create an expense model for a company. - ANS-Start with each different department of a company, the # of employees in each, the average salary, bonuses, and benefits, and then make assumptions on those going forward. Assume number of employees is tied to revenue an then assume growth rates for salary, bonuses, benefits, and other metrics Cost of goods sold is tied directly to revenue and each unit produced should incur an expense Other items such as rent, Capital Expenditures, and other miscellaneous expenses are either linked to the company's internal plans for building expansion plans or to revenue for a more simple model Let's say we're trying to create these models but we don't have enough information or the company doesn't tell us enough in its filings -- what do we do? - ANS-Use estimates. If revenue is not broken out, you can just assume a simple growth rate. For the expanses, if you don't have employee-level information, then you can assume that major SG&A are a percent of revenue and carry that assumption forward Continues...