I recently stumbled a bit on a technical question in an interview and wanted to share it.
Although I knew the answer, I had not prepared for this specific question and it did not come out very naturally. I resorted to writing down some debits and credits on my paper before answering just to be sure. The question is as follows.
What is the total effect on the financial statements of selling a piece of machinery with Book Value of $80 for $100?
Answer:
1) There is Gain on sale of $20. This increases Operating Profit by $20 and Increases cash flow by 20*(1-t) assume tax of 40% = 12
2) Cash Flow Statement
A) Non-cash gain of $20 added back * this is kind of tricky. Even though the buyer may be paying cash this is a non cash gain because of...
B) Cash flow From Investments increases by $100
SO: Net Change in Cash =
NI = 12
-20 Non Cash Gain
+100 Investment
Net Change in Cash = 92
Balances by Assets (-80 BV + 92 Cash) = 12
Net Income closes to RE = 12
This is a particularly good question because I have not ran across it in guides, and because it utilizes multiple pieces of the CFS, along with the trick of a "non cash gain"
Best