The three financial statements include: Income statement (a), cash flow statement (b), balance sheet (c)

1. How would depreciation going up by $100 affect the financial statements? Assume a tax rate of 40%

Example answer:

a. +100 dep leads to - 100 operating income. +40 income tax provision = -60 change in net income.

b. -60 net income + 100 non-case charges = 40 cash flow from operating = 40 change in cash

c. 40 cash and cash equivalents - 100 PPE = -60 total assets = -60 Retained earnings = -60 total liabilities & shareholder's equity.

2. How would accrued compensation going up by $100 affect the financial statements?

3. How would inventory going up by $100 affect the financial statements assuming you pay cash for it?

4. Why is the income statement not affected by changes in inventory?

5. Assume that $200 of products are sold at a cost of $100. What happens on the financial statements?

6. Apple decides to purchase a factory to produce iphones using $100 million in debt. How are the financial statements affected at the start of the year 1 before anything else happens?

7. One year later, at the start of year 2 assume the debt has begun to be paid off, the interest rate is 10% and the payment in year 2 is all interest and no principle. Also assume the factory depreciates at a rate of 10% per year. What happens on the financial statements?

8. At the end of year 3, the factory shuts down and is written to $0. The loan must now be repaid. What happens on the financial statements?

9. A daily newspaper start up sells a year long subscription for $12. You sell 1 subscription on Jan1. What happens on the financial statements? How might they change on Jan 31, Dec 31?