IB - adv accounting

Advanced accounting questions( (only some) - don't review as often as other ones

What are deferred tax assets/liabilities and how do they arise?

They arise because of temporary differences between what a company can deduct for cash tax purposes vs. what they can deduct for book tax purposes.

Deferred Tax Liabilities arise when you have a tax expense on the Income Statement but haven’t actually paid that tax in cold, hard cash yet; Deferred Tax Assets arise when you pay taxes in cash but haven’t expensed them on the Income Statement yet.

The most common way they occur is with asset write-ups and write-downs in M&A deals – an asset write-up will produce a deferred tax liability while a write-down will produce a deferred tax asset

Walk me through how you create a revenue model for a company.

Two ways to do this. 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.

Start with “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 to their revenue.

Walk me through the major items in Shareholders’ Equity.

Common items include
Common stock - the par value of the shares they have issued

Retained Earnings – How much of the company’s Net Income it has “saved up” over time.

Additional Paid in Capital – This keeps track of how much stock-based compensation has been issued and how much new stock employees exercising options have created. It also includes how much over par value a company raises in an IPO or other equity offering.
Treasury Stock – The dollar amount of shares that the company has bought back.

Accumulated Other Comprehensive Income – This is a “catch-all” that includes other items that don’t fit anywhere else, like the effect of foreign currency exchange rates changing.

Walk me through what flows into Retained Earnings.

Retained earning is whatever was previously in retained earnings, plus net income and minus dividends paid out.

Walk me through what flows into Additional Paid-In Capital (APIC).

APIC = Old APIC + Stock-Based Compensation + Stock Created by Option Exercises

If you’re calculating it, take the balance from last year, add this year’s stock-based compensation number, and then add in however much new stock was created by employees exercising options this year.

What is the Statement of Shareholders’ Equity and why do we use it?

This statement shows all the items in shareholders equity, and can also show the calculations more in depth. It’s not commonly used, but you can use it to analyze companies with unusual stock based compensation plans and stock option situations.

How do you project Balance Sheet items like Accounts Receivable and Accrued Expenses in a 3-statement model?

You calculate them by assuming they are percentages of revenue, expenses, and other key categories. For example, Accounts receivable as a % of revenue.

How should you project Depreciation & Capital Expenditures?

The simple way: project each one as a % of revenue or previous PP&E balance.

The more complex way: create a PP&E schedule that splits out different assets by their useful lives, assumes straight-line depreciation over each asset’s useful life, and then assumes capital expenditures based on what the company has invested historically.