Investment Banking - Technical Interview Questions With Verified Solutions

Investment Banking - Technical Interview Questions With Verified Solutions Income Statement - ANS 1. Sales Revenue 2. COGS Gross Profit 3. Operating Expenses (SG&A) Operating Income (EBITDA) 4. Depreciation EBIT 5. Interest 6. Taxes Net Income Why is the Income Statement not affected by changes in Inventory? - ANS The expense is only recorded when the goods associated with it are sold (COGS) Statement of Cash Flows - ANS 1. Net Income 2. Operating Activities Depreciation Changes to AR, Liabilities, Inventories, Other Total Cash Flow from Operating Activities 3. Investing Activities Capital Expenditures Investments/Other Total Cash Flow from Investing Activities 4. Financing Activities Dividends Borrowings Sale of Stocks/Other Total Cash Flow from Financing Activities Change in Cash and Cash Equivalents Balance Sheet - ANS 1. Assets Current Assets (Cash, AR, Inventory, etc) Long-term Assets (PP&E, Amortization, etc.) 2. Liabilities Current Liabilities (AP, etc.) Long-term Liabilities (Debt, Minority Interest) 3. Shareholder Equity Assets = Liabilities + Shareholder Equity How do the 3 statements link together? - ANS Net income from Income Statement flows into Shareholders' Equity on the Balance Sheet and into the top line of the Cash Flow Statement Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement Cash Flow investing and financing activities affect Balance Sheet items such as PP&E and Shareholders' Equity If a company incurs $10 (pretax) of depreciation, how does this affect the three financial statements? - ANS 1. Income Statement: Depreciation is an expense, so EBIT declines by $10. Assuming a 40% tax rate, net income declines by $6.