Table of Contents Expand. Depreciation of Long-Term Assets. Impact of a Sale. The Bottom Line. Key Takeaways Assumptions are built into many items in financial statements, which, if changed, can impact the company's bottom line positively or negatively. Generally accepted accounting principles GAAP state that an expense for a long-lived asset must be recorded in the same accounting period as when the revenue is earned, hence the need for depreciation.
Depreciation places the cost as an asset on the balance sheet and that value is reduced over the useful life of the asset. Depreciation can be calculated using the straight-line method or the accelerated method. The salvage value and the expected useful life are two assumptions made when calculating depreciation that can alter the financial results of a company. Fraud Investors and analysts should thoroughly understand how a company approaches depreciation because the assumptions made on expected useful life and salvage value can be a road to the manipulation of financial statements.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Accounting Are depreciation and amortization included in gross profit? Partner Links. An impairment in accounting is a permanent reduction in the value of an asset to less than its carrying value.
Straight Line Basis Definition Straight line basis is the simplest method of calculating depreciation and amortization, the process of expensing an asset over a specific period. Capital Lease Definition A capital lease is a contract entitling a renter the temporary use of an asset and, in accounting terms, has asset ownership characteristics.
Capitalized Interest Definition Capitalized interest is the cost of borrowing to acquire or construct a long-term asset, which is added to the cost basis of the asset on the balance sheet. Dolorum est tempore amet repellat beatae. Velit necessitatibus repellat rerum sed magnam iste est dignissimos. Id qui ea accusantium. Vel reiciendis magni sed accusantium. Minus et debitis esse aut ut ut fuga.
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November Investment Banking. Leaderboard See all. Interview Question with the Three Financial Statements. Rank: Baboon Then depreciation is added back due to the fact that it is a non-cash expense. Answering Financial Statements Questions There are numerous iterations of this question. We list some of the common ones below.
Log in or register to post comments. Comments 58 Add comment. Best Response. Jan 3, - pm. I just got this in a phone interview 20 min ago.
Excel Model Templates and Training. Learn more Suggested Resource Learn More. Learn more. Hedge Fund Pitch Template. Cash flow is the same no matter what the depreciation is. Financial Modeling Courses. What if the poor guy looked at your wrong response and then got confused. Private Equity Case Interview Samples. I've tried to do a search already, but could not find any specific information that helped. Thank you. HF Interview Questions. Investment Banking Interview Case Samples.
Investment Banking Interview Brainteasers. Hedge Fund Pitch for Interviews. Jukehead O Rank: Chimp 4 Jan 3, - pm. Good Subscriber Account active since Shortcuts. Account icon An icon in the shape of a person's head and shoulders. It often indicates a user profile. Log out. US Markets Loading H M S In the news. Portia Crowe. One more thing Loading Something is loading. Not necessarily. It depends on the type of company and the specific situation - here are a few different things it could mean:.
Recently, banks have been writing down their assets and taking huge quarterly losses. First, confirm what type of "bailout" this is - Debt? A combination? The most common scenario here is an equity investment from the government, so here's what happens:. No changes to the Income Statement. This is counter-intuitive. If this seems strange to you, you're not alone - see this Forbes article for more on why writing down debt actually benefits companies accounting-wise:.
When would a company collect cash from a customer and not record it as revenue? Companies that agree to services in the future often collect cash upfront to ensure stable revenue - this makes investors happy as well since they can better predict a company's performance.
Per the rules of GAAP Generally Accepted Accounting Principles , you only record revenue when you actually perform the services - so the company would not record everything as revenue right away. If cash collected is not recorded as revenue, what happens to it?
Over time, as the services are performed, the Deferred Revenue balance "turns into" real revenue on the Income Statement. What's the difference between accounts receivable and deferred revenue? Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the company is waiting on, whereas deferred revenue represents how much it is waiting to record as revenue.
How long does it usually take for a company to collect its accounts receivable balance? Generally the accounts receivable days are in the day range, though it's higher for companies selling high-end items and it might be lower for smaller, lower transaction-value companies. What's the difference between cash-based and accrual accounting? Cash-based accounting recognizes revenue and expenses when cash is actually received or paid out; accrual accounting recognizes revenue when collection is reasonably certain i.
Most large companies use accrual accounting because paying with credit cards and lines of credit is so prevalent these days; very small businesses may use cash-based accounting to simplify their financial statements.
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