Accounting & Financial Statements
“Walk me through what happens across the income statement, cash flow statement, and balance sheet if Revenue increases by $100 for the year, assuming the extra revenue flows through at a 40% margin, with everything else held constant.”
Walk me through what happens across the income statement, cash flow statement, and balance sheet if Revenue increases by $100 for the year, assuming the extra revenue flows through at a 40% margin, with everything else held constant.
Task: Starting from Solstice Components Inc.'s baseline figures below, compute the new EBIT, new Net Income, and new Cash Flow from Operations after a $100 increase in Revenue — and confirm the balance sheet still balances.
Baseline figures before the revenue increase, plus the scenario change:
| Line Item | Amount |
|---|---|
| Baseline Revenue | $2,000 |
| Baseline EBIT | $500 |
| Interest Expense | $50 |
| Tax Rate | 25% (0.25) |
| Baseline Net Income | $337.5 |
| Baseline CFO | $467.5 |
| Increase in Revenue (scenario) | $100 |
| Incremental EBIT Margin on New Revenue | 40% (0.40) |
| Portion of New Revenue Collected in Cash This Year | 60% (0.60) |
The extra revenue flows through at a 40% margin, so only part of it becomes additional operating profit — the rest is absorbed by incremental COGS and variable operating costs.
New EBIT = Baseline EBIT + (Increase in Revenue × Incremental EBIT Margin)
Using this formula, compute the new EBIT.
From the new EBIT, subtract Interest Expense (unchanged) and apply the tax rate.
New Net Income = (New EBIT − Interest Expense) × (1 − Tax Rate)
Using this formula, compute the new Net Income.
Not all of the extra revenue is collected in cash this year — the uncollected portion sits in Accounts Receivable and works against the higher Net Income.
Increase in Accounts Receivable = Increase in Revenue × (1 − Portion Collected in Cash)
New CFO = Baseline CFO + Change in Net Income − Increase in Accounts Receivable
Using this formula, compute the new CFO.
Δ Cash = Δ CFO
Δ Accounts Receivable = Increase in Revenue × (1 − Portion Collected in Cash)
Δ Assets = Δ Cash + Δ Accounts Receivable
Δ Equity (Retained Earnings) = Δ Net Income
Using these formulas, confirm that Δ Assets = Δ Liabilities + Δ Equity — i.e., that the balance sheet still balances after all three statements update.
Try answering out loud first — then reveal the model answer and compare.
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