depreciation expense

hmmm may be off but....

balance sheet
cash goes down by 10M
PPE goes up by 10M
subtract 1M accumulated dep
net PPE will be up 9m

therefore net assets= -1M

a/payable will go down by .3M
equity down .7M
net Liabilities +equity = -1M

balanced

income statement
dep exp up 1M
tax savings of .3M
net income down .7M


Cash flow statement
CFO (indirect method)
net income down .7M
plus dep addback 1M
plus the decrease in a/p of .3
net = 0



Edited 1 time(s). Last edit at Saturday, April 14, 2007 at 09:11PM by bmwhype.
 
Except for maybe saying it was taxes payable instead of accounts payable.. by george, I think you've got it!
 
the funny thing is i already passed CFA level 1, did superb on the quant and FSA, yet i am not very confident in my answers.

the real struggle with this question is why is depreciation expense included at t=0?
 
Ahhh.

I was assuming you meant end of the year effect since you don't normally prepare daily BS, Inc Stmnt and Cash flow statements when you have a transaction. While balance sheets can be preppped at any ponit in time, IS and CF need to cover a set period..

t=0 there is no income statment effect and no cash flow from operations effect.

also, I just looked at CFO. There is the -10M CFI effect on the cash flow statement for the PPE.
 
so...

t=0

b/s
cash= -10m
CapEx= 10M

CF statement
CFI = -10

-------------------
t=1 (one year later)
balance sheet
cash goes down by 10M
PPE goes up by 10M
subtract 1M accumulated dep
net PPE will be up 9m

therefore net assets= -1M

a/payable will go down by .3M
equity down .7M
net Liabilities +equity = -1M

balanced

income statement
dep exp up 1M
tax savings of .3M
net income down .7M


Cash flow statement
CFO (indirect method)
net income -.7M
dep addback +1M
plus taxes payable of -.3
net = 0
 
One thing about using the t=0 type notation. This is not a time value problem and it doesn't really fit. For example, a company buys PPE on 3/15/06 and prepares financials annualy on 12/31. You won't be looking at t=1 on 3/15/07, you'll be looking at financial statement effects on 12/31/06.


Remember, cash flow statements like income statements cover a period of time (quarter, year) so you'll pretty much always be looking at both or neither, so at t=0 there is no cash flow statement.

The t=1 (or more accurately first year-end) Cash flow statement will also include the the CFI of -10M, becuase of the reduction in cash that took place during the period covered by the cash flow statement for the PPE purchase. In subsequent years you only have the depreciation effects on the financials.
 
so the initial impact will only be

b/s
cash= -10m
CapEx= 10M
 
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