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Happy Monday, future bankers!

Hope everyone has had a great start to their week! Today we’ll be going over accounting standards for recognizing revenue, talking about your favorite class in college, and the stock that is up ~100% in 5 days.

🚀 Let’s get into it.

🔢 Technical Question

“When would a company collect cash from a customer, but not record it as revenue?”

When asked about a scenario where a company collects cash from a customer but does not record it as revenue, you can provide the following insights:

1. Cash Advances or Deposits: Sometimes, a company receives cash advances or deposits from customers. These payments are made in advance for goods or services that will be delivered at a later date. Since the revenue has not been earned yet, the company does not recognize it as revenue immediately. Instead, it records the cash received as a liability or in a specific account (such as a “cash advances” account) until the corresponding revenue is earned.

2. Contractual Agreements: Consider a situation where a company enters into a long-term contract with a customer. For instance, an engineering firm contracted to build a major highway for a city. The project may span several years. If the city pays the entire project cost upfront, the engineering firm would record all the revenue at that time. However, if the payments are made in installments over the project’s duration, the firm would recognize revenue periodically as it bills the city for services rendered. In this case, the critical event triggering revenue recognition is the signing of the contract, and the measurable transactions occur when the firm invoices the city.

Remember that revenues are recognized when earned, not necessarily when received. So, even though cash is collected, it may not immediately translate into revenue on the company’s books.

🗣 Behavioral Question

"What has been your favorite class in college? Why?"

Consider the following best practices when responding to a question like this one:

1. Relevance: Choose a class that demonstrates skills or qualities relevant to the job. While it doesn’t have to be directly finance-related, it should highlight attributes like critical thinking, teamwork, communication, or problem-solving. In fact, depending on the interviewer, it may even be best to choose a class that is not finance-related. Many bankers like to think of themselves as well-rounded, and saying that your favorite class was ‘Financial Derivatives’ may come across as one-dimensional.

2. Specificity: Be specific about the class and why it stood out. Avoid generic answers like “I enjoyed all my classes.” Instead, delve into the details of what made that particular class memorable.

3. Connection: Relate the class to the role you’re applying for. Explain how the skills or knowledge gained from that class can be applied in an investment banking context.

Example Response:

“My favorite class during college was ‘Advanced Creative Writing.’ While it wasn’t directly related to finance, it significantly shaped my abilities in communication, attention to detail, and critical thinking. Here’s why:

1. Creativity and Clarity: In creative writing, I learned to craft compelling narratives, which translates well to creating persuasive writing in a business context.

2. Editing Skills: The rigorous editing process in writing taught me precision. I’d spend hours refining sentences, choosing the right words, and eliminating redundancy.

3. Feedback and Collaboration: Workshops in the writing class involved peer critiques. Constructive feedback helped me improve my work. Similarly, in banking, collaboration with colleagues and clients is essential. I appreciate diverse perspectives and value teamwork.

4. Adaptability: Writing across genres—fiction, poetry, essays—taught me to adapt my style. Similarly, in finance, I’ve adapted to various tasks, from numerically-based valuation analysis to verbose client presentations.

Overall, the class has not only honed my writing skills but also shaped my mindset—making me adaptable, detail-oriented, and capable of presenting complex ideas succinctly."

🗞 Industry News

Up 100% Since February 7th 🚀 

Arm (NASDAQ:ARM) stock is riding high on a wave of investor enthusiasm following a stellar earnings report that highlighted the impact of artificial intelligence (AI) spending on its sales. The company's shares skyrocketed by as much as 42%, with trading volume exceeding six times the usual average over the past three months. This surge, which briefly catapulted the stock's gains to over 100% since the earnings announcement on Feb. 7, reflects a growing appetite among investors for companies involved in AI.

The remarkable increase in Arm's stock price is credited to its expansion beyond smartphone technology, particularly its ventures in AI, which are driving both growth and profitability. With revenue projections for the March quarter surpassing analyst estimates by a significant margin, Arm's CEO, Rene Haas, emphasized that the AI opportunities are still in their infancy, hinting at continued growth potential. Traders are feeling optimistic about the company's prospects, evident in the strong demand for options, especially short-term calls betting on further share price increases.

Although Nvidia Corp. has historically been the kingpin in the AI-driven demand for computing power, Arm's recent performance signals its emergence as a notable contender in the field. Despite initial plans for a merger between Arm and Nvidia, valued at a whopping $40 billion, the deal fell through due to opposition from Arm's customers and regulatory hurdles. Presently, Arm's market value exceeds $140 billion, buoyed by SoftBank Group Corp.'s majority ownership since its acquisition in 2016.

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