How Can I Sign Minnesota Banking IOU

How can i industry sign banking minnesota iou

hello and welcome to our next free video tutorial here on how to answer interview questions about how various changes on the three financial statements are reflected and what different light items change each time now you can see our normal three statement interview question model here that lets you modify different light items such as revenue expenses some of the balance sheet line-item some of the cash flow statement line items and there's a link right below this video so you can actually go and just grab this file for yourself but what we're gonna focus on this time around is how changes in accounts receivable which I have abbreviated to a are right here how changes an accounts receivable affect the three financial statements you can see the URL for this file right here at the top of the screen or just click on the link right below the video and you can get this in practice with this yourself so this question how changes an AR affect the three statements it is a very real-world scenario because companies are doing this all the time so when you go and buy a product for example and you're not paying cash they don't receive it immediately in cash but instead you either get it and then you pay later or perhaps you pan credit or something like that well that is exactly this is exactly what happens at companies they have to record something for accounts receivable when they don't receive the payment from you in cash right away so it's a very real-world scenario unlike some of the other more artificial questions so something like depreciation going up or down by a hundred or ten or whatever that is somewhat more or official but this is a very real-world scenario and it's a very common question interviews because they want to test if you understand the difference between recording actual profits received in cash versus what gap or IFRS or other accounting standards the accounting framework tells you to actually record on the basis of accrual accounting so first let's just quickly review what exactly is accounts receivable and you can see it up here on our balance sheet this is from before any changes take place and this is after any changes take place over here on the right side so accounts receivable right here it is a current asset on the balance sheet what it actually mean well it is for scenarios wherein you have recorded revenue from customers but you have not actually received the cash payment from them yet so it's almost as if they've sent you an IOU and said you know what we'll take your product or service and we'll take advantage of it right now but we're gonna pay you later so maybe we paid you on credit and you'll get the actual cash payment later or maybe you've sent us the product or service and after we receive it is when we'll be actually remitting payment to you so they've sent the invoice delivered the product but they are still waiting on the payment from a customer now these standards and how you recognize revenue from this differs a little bit by industry and by company but this is the basic idea the most important point to note here is that if you have a scenario where you're recording something for accounts receivable or it's going up as we are discussing it here then revenue also has to go up because if accounts receivable goes up it means that you are actually recording something as revenue because it has been delivered to the customer they've been invoiced for it they know they have to pay for it and now you were just waiting on the cash for that product or service from the customer so what happens here when it changes well we're gonna go through two different cases first when accounts receivable goes up and then second what happens when accounts receivable goes down so in the first case here when AR goes up as I say here what happens is we're recording revenue and profit but we haven't received any cash yet so it's a little bit counterintuitive but in this case cash is actually gonna go down and we'll see why as we go through this I have the intuition described right here that essentially it's an issue of paying taxes on profit that we haven't actually received in cash yet but let's go up to our three statements and trace through this and see what happens on the income statement on the balance sheet and over here on the cash flow statement so let's go up here and I'm gonna say accounts receivable increases by a hundred at first and notice here how I've separated these out the increases by and decreases by because the accounting treatment is different depending on whether accounts receivable is going up or going down because this one corresponds to recording revenue but not receiving it and then this one corresponds to just the collection part just collecting cash from customers so if AR increases by a hundred let's go through and see what happens here so you can see highlighted in red all the changes revenue goes up by a hundred cruise profit goes up by a hundred and our operating income ultimately goes up by a hundred as well as does our pre-tax income now at a forty percent tax rate what that means is our taxes are gonna go up by forty because pre-tax income goes up by 100 and our net income at the bottom ultimately goes up by sixty because 100 times one minus forty percent is an increase of sixty trying to income so bottom line is since we've delivered it to the customer according to accounting standards we have directed it recognize this as revenue which flows through all the way to the bottom in the form of increased net income on the income statement so now let's go to the cash flow statement and see what happens there I always recommend going in this order in interviews because if you finish off with the balance sheet you can check yourself and verify that it still balances whereas if you do this second it's gonna be much harder to verify that so this is the order I always recommend going in now on the cash flow statement then income is up by sixty but remember we have to adjust because accounts receivable has gone up we haven't actually gotten that hundred in cash yet so here we're making this adjustment we're saying hey look at this our revenue we said it went up by a hundred but this was actually a non-cash increase in our revenue because we haven't collected this in cash from customers so instead we're gonna do is make this go down by a hundred here to reflect the fact that actually our cash from this entire thing is gonna be going down because we didn't get this 100 in cash from the customer so no other changes in investing or financing activities because those are not impacted by this but at the bottom we can see that our cashier has gotten down by forty and our increased or decreasing cash this is down by forty as well so now what happens on the balance sheet well here our cash is down by forty our accounts receivable is up by a hundred because that is increased since we haven't gotten that portion in cash yet and so ultimately our total assets here have gone up by sixty on the other side of the balance sheet our retained earnings is up by sixty because our net income over here was up by sixty net income of course flows directly into retained earnings on the balance sheet and so this side the liabilities equity side is also up by sixty and our balance sheet balances so that's what happens here now you might still be wondering to yourself okay well I get the part of how accounts receivable can go up that makes sense and I get the part about how retained can go up because net income is increased but what's the deal with cash and cash equivalents how can that actually go down in this scenario and it's really what I said before why is it down by 40 well it's down by 40 because you're paying 40 extra in taxes now except you haven't received this 100 in revenue yet so the fact that cash and cash equivalents has got down by 40 means that you're paying those cash taxes you're paying 40 extra in real cash taxes but you haven't gotten the hundred in revenue that you recorded and so the cash is down by 40 because of those extra taxes that you've paid on revenue that is non-cash so far so that's the intuition for this now let's look at the second scenario what happens when AR goes down after you've collected the cash and I have some of the explanation here that there are no changes on the income statement but cash now has to increase to reflect that collection AR will decrease because now you've collected it and then the other side still balances via to retained earnings so let's go up here and break down this scenario so I'm gonna keep this AR increases by and now I'm just gonna say R decreases by so we've sent the customer the product or service and now we're gonna collect the cash from them that they owe us so let's go down the statements so in the income statement nothing actually changes so when you have this scenario where you record AR and then you go in and actually collect it nothing here changes revenue stays the same as what we had before and income tax is net income all that it really stays the same as what we had recorded previously so let's go to the cash flow statement now and see what happens here so at first glance it seems like nothing here has changed but actually something here has changed which is that we don't make an adjusting entry for accounts receivable anymore the change in accounts receivable why is that well because now that we've actually collected this in cash the change here is not going to affect our cash balance because now we have it so now all that really happens here is that it's as if revenue has just gone up by a hundred and it's been cash revenue the whole time and so as a result our net income here is up by sixty cash flow from operations up by sixty and then at the very bottom our cash has also gone up by sixty why because this time around we've recorded this increase of a hundred and revenue except now this net income this is a real increase this is now a real cash in so we don't have to make an adjusting entry on the cash flow statement so now on the balance sheet what happens well our cash is up by sixty because now this is a real gain our cash is really increased by this much because we've collected that cash and we've paid taxes on it but overall we've collected one hundred in cash and we paid taxes of forty so cash has gone up by sixty here and then on the other side retained earnings still up by sixty because our net income of course is still up by sixty and of course our balance sheet now balances it did also balance before but it's still balances was really what I meant there so that's what happens when you increase a our meaning that you record revenue and yourself to collect cash from customers and then that's what happens when a are then decreases after you've done the first snare you've a product or service to a customer you are still waiting on them and then finally you collect it from them or they send in the cash payment and now AR goes down and you can see here the intuition behind this so that's what happens when a are changes on the three financial statements to sum up what we covered very important question because it's a very real-world scenario and it's a very common question in interviews to test your knowledge of accounting and accrual accounting versus cash accounting and how those differ accounts receivable is just an account on the balance sheet for cash that you still need to collect for customers but which you have earned recorded as revenue you're still waiting on cash payment from them when it goes up what happens is revenue goes up pre-tax income goes up net income also goes up but on the cash flow statement you haven't received it in cash yet you have paid the taxes though and so there you need to make an adjusting entry everyone ends up happening is that cash actually goes down at first AR goes up and retain earnings on the other side goes up and then when you finally collect it income statement stays the same but now you don't make an adjusting entry in the cash flow statement and now on the balance sheet all that happens is cash goes up and then retained earnings goes up as we've shown right here with the cash increase and then retained earnings down here so that's it for this lesson hopefully you learned some more or review this concept if we already know about accounts receivable and how it works on the three financial statements you