Investment Banking Interview Prep

Investment Banking Interview Prep

‼️A company generates $100 in Net Income in year one of operations.

⁉️At the end of that year, how much money is in the bank account?

This question is a little bit more involved than it might seem at first.

The trick here is to remember that the net income we see on an income statement reflects the earnings of the business in terms of economic substance (i.e. accruals), but not necessarily the cash flows in and out.

For example, a customer could purchase a good service, but not pay for it until year two, but we would still record this as revenue and the income statement.

Conversely, a customer could pre-pay for a service that won’t be delivered until year two. In this case, we would have the cash, but we don’t record revenue until the transaction is earned.

So in short, there is no way to know how much money is in the bank account without having a better understanding of the accruals that occurred within the year.

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