• The Daily Technical
  • Posts
  • The Daily Technical #88: Can the enterprise value of a company turn negative?

The Daily Technical #88: Can the enterprise value of a company turn negative?

How to answer "How would a $100 inventory write-down impact the three financial statements?"

January 10, 2025

Good morning. Welcome to the 88th edition of The Daily Technical. You’re here for one reason so let’s dive in.

First time reading? Sign up here.

OVERVIEW OF YESTERDAY’S QUESTION
How would a $100 inventory write-down impact the three financial statements?

IS: The $100 write-down charge will be reflected in the cost of goods line item. The expense would decrease EBIT by $100, and net income would decline by $70, assuming a 30% tax rate.

CFS: The starting line item, net income, will be down $70, but the $100 writedown is an add-back since there's no actual cash outflow from the write-down. The net impact to the ending cash will be a $30 increase.

BS: On the asset side, cash is up $30 due to inventory being written down $100. This will be offset by the decrease of $70 in net income that flows through retained earnings on the equity section. Both sides of the balance sheet will be down by $70 and remain in balance.

Common Mistakes

  1. Misplace the write-down charge within income statement items. Remember, the write-down is part of the cost of goods, affecting EBIT directly by $100. Placing it elsewhere misrepresents financial impacts.

  2. Neglecting tax implications. The write-down decreases net income when taxed at 30%, reducing it by only $70, not $100.

  3. Forgetting to add back non-cash charges in the cash flow statement. The inventory write-down doesn't result in cash outflow, which is why it’s added back, resulting in a $30 cash increase.

TL;DR

  • IS Impact: Write-down as $100 COGS expense lowers EBIT by $100; net income falls $70 with 30% tax.

  • CFS Impact: Net income down $70; add back $100 non-cash write-down; cash increases $30.

  • BS Impact: Cash up $30, inventory down $100; total assets fall $70. Retained earnings drop $70, keeping balance.

TODAY’S QUESTION
Can the enterprise value of a company turn negative?

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

THAT’S A WRAP
Before You Go: Here’s How We Can Help!

Jobs: we’re tracking all open jobs for the classes of 2025 - 2028. Our list is updated daily. Check them out here

Mentorship: if you’re looking for 1:1 career mentorship, reply to this email to book a consultation with one of our coaches.

See you tomorrow,

Mike Lukasevicz
Founder @ HirePrep