How to Answer: If a company buys an asset, walk me through the impact on the 3 financial statements? The asset value is $1 million
Advice and answer examples written specifically for a Finance job interview.
21. If a company buys an asset, walk me through the impact on the 3 financial statements? The asset value is $1 million
How to Answer
To answer this question, give a made up situation or a real-life scenario based on experience. An entry-level answer will be 3-4 sentences and an experienced answer should provide much detail. If you were to be unsure and get stuck answering this question, just remember the basics of how an asset affects the balance sheet first and start there. In an interview, even the best and smartest people get nervous and forget stuff. This is a basic question to understand the very first financial statement that would be impacted by this purchase.
Written by Bobbi Witt on June 18th, 2018
Entry Level
"On the Balance Sheet, cash will decrease by $1 million on the asset side, and increase the asset for equipment $1 million. Recording the debit and credit on the Balance Sheet. On the Income Statement there will be no impact on the first year and then the recording of depreciation expense on the purchased equipment. The Cash Flow Statement will have a decrease to cash."
Written by Bobbi Witt on June 18th, 2018
Experience
"If an asset is purchased by a business for $1million the impact to each of the 3 financials statements would be:
First on the Balance Sheet, cash will decrease by $1 million; decreasing the asset side of the balance sheet and at the same time the asset will be recorded as equipment for $1 million which will increase the asset side of the balance sheet by the same amount. Hence, the balance sheet of the company will be recorded.
Secondly, on the Income Statement there will be no impact on the first year of the income statement, but after the first year the company will have to charge depreciation expense on the purchased equipment which the company will show reflected on the Income Statement.
Thirdly, on the Cash Flow Statement, assuming that only cash has been paid by the company to purchase the equipment. The Cash Flow from Investing will result in the cash outflow of $1million, so a decrease to cash."
Written by Bobbi Witt on June 18th, 2018