IB INTERVIEW FOUNDATIONS

Accounting & the three statements

Understand when earnings, cash and balance-sheet movements tell different stories.

Start with the economic event. Decide what has been earned, what cash changed hands and what asset or obligation remains. Then connect net income to operating cash flow and reconcile the balance sheet. A memorized addback is not a complete explanation.

Ask yourself: Does the transaction create cash today, recognize earnings today, or both?

Put it into practice

Beginners: work through the cash purchase first. More experienced candidates: challenge the timing of the tax benefit.

Equipment and cash →Revenue that has not been collected →Customer prepays →Inventory on supplier credit →

Beyond the calculation

State assumptions before calculating. Explain the result in plain English, then identify what information could change your conclusion. A numerical match alone does not show that your reasoning is sound.

Ready to combine valuation skills? Try the decision case →

Define working capital before grading it

Balance-sheet working capital is current assets minus current liabilities. Cash and current borrowing belong in that broad liquidity measure.

Operating working capital for an unlevered DCF normally excludes cash, investments and financing debt. State which operating assets and liabilities you include; treatment can vary by business and purpose.

Example: cash 20, receivables 45, inventory 30, payables 25 and current borrowing 10. Broad working capital is 20 + 45 + 30 − 25 − 10 = 60. Operating working capital is 45 + 30 − 25 = 50. Neither answer should be graded without knowing the requested definition.

An increase in operating working capital uses cash, all else equal. More receivables or inventory can increase it; paying down operating payables can also increase it. Ask about cash-flow timing rather than memorizing an addback.