IB Interview Questions: Level 2 Accounting Questions

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In continuation with : IB Interview Questions: Accounting : Part-5

Three Statement Connections/Flows

1. How would we account for a purchase of Inventory if we pay for it today? What is the Income Statement impact if we haven’t sold the Inventory to a Customer?


We would reduce Cash and increase Inventory at the time of the initial purchase. But we don’t record any Income Statement impact until the Inventory is sold to a Customer.




2. How are the Three Financial Statements connected?

Net income at the bottom of the Income Statement flows to Retained Earnings in the Balance Sheet and to CFO at the top of the Cash Flow Statement.

In the Cash Flow Statement, we add back non-cash items like Depreciation and adjust for changes in Net Working Capital, to arrive as Cash Flow from Operations.

In Cash Flows from Investing, we then deduct Capital Expenditures (based on the PP&E account in the Balance Sheet).

Finally, in Cash Flows from Financing, we adjust for Lender and Investor cash inflows/outflows based on our Debt and Equity accounts.

After these adjustments, we arrive at our Net Change in Cash which bridges the Cash Balance from the prior period to the current period.

3. Walk me through the 3 Financial Statement impacts if Depreciation increases by ₹ 10?

The $10 Depreciation Expense reduces Taxable Income by ₹ 10 which creates a tax credit of ₹ 2 (₹ 10 Depreciation * 20% Tax Rate).

The net impact to Net Income is (₹ 8) which carries to CFO where we add the ₹ 10 Depreciation back which results in a net impact to CFO of +₹ 2.

The +₹ 2 of CFO flows down to a Net Change in cash of +₹ 2.

The +₹ 2 Cash impact increases the Cash account by +₹ 2 and PP&E decreases by the (₹ 10) Depreciation expense, leading to a net impact to Assets of (₹ 8).

The offsetting entry is adding the (₹ 8) Net Income impact to Retained earnings to balance the Balance Sheet.


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