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Basic Accounting Questions and Answers.
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Basic Accounting Questions and Answers.
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Basic Accounting Questions andAnswers.
What are the 3 major financial statements? ANS - Income Statement, Balance Sheet, Cash Flow
Statement
Walk me through the Income Statement ANS - Gives the company's revenue and expenses, and goes
down to Net Income, the final line on the statement.
Walk me through the Balance Sheet ANS - Show the company's Assets (resources - Cash, Inventory,
PP&E), Liabilities (Debt and Accounts Payable) and Shareholders' Equity.
Assets must equal Liabilities plus Shareholders' Equity.
Walk me through the Cash Flow Statement ANS - Begins with Net Income, adjusts for non-cash
expenses and working capital changes, and then lists cash flow from investing and financing activities; at
the end, you see the company's net change in cash.
IS major Line items ANS - Revenue, COGS, SG&A, Operating Income, Pretax Income, Net Income
BS major line items ANS - Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued
Expenses, Debt, Shareholers' Equity
CFS major line items ANS - Net Income, Depreciation & Amortization, Stock-Based Compensation,
Changes in Operating Assets & Liabilities, Cash Flow From Operations, CapEx, Cash Flow from Investing,
Sale/Purchase of Securities, Dividends Issued, Cash Flow from Financing
How do the 3 statements link together? ANS - - Net Income from the IS flows into Shareholders' Equity
on the Balance Sheet, and into the top line of the Cash Flow Statement
- Changes to BS items appear as working capital changes on the CFS. Investing and Financing activities
affect BS items such as PP&E, Debt and Shareholders' Equity
- Cash and Shareholders' Equity items on BS act as plugs, with Cash flowing in from the final line on the
CFS
, If I wanted to review the overall health of a company and only had one statement, which statement
would I use and why? ANS - Use the CFS
- gives the true picture of how much cash the company is generating, independent of non-cash
expenses.
- cash flow is the number one concern when analyzing the overall health of a business
I could only use 2 statements - which 2? ANS - - Income Statement and Balance Sheet
- Can create the Cash Flow Statement from both (as long as you have a before and after BS for the
period the IS is tracking)
Walk me through how Depreciation going up by $10 would affect the statements. ANS - IS: Operating
income down by $10, Net Income down by $6 (40% tax rate)
CFS: NI down by $6, but $10 is non-cash and gets added back -> CFO goes up by $4. Overall net change
in cash up by $4.
BS:
- Assets: PP&E down by $10 from dep, Cash up by $4 from CFS. So, assets down by $6.
- Lia + SE: Net Income fell by $6, so SE down by $6.
- both sides down by $6 and BS balances
Why does Depreciation affect the cash balance despite being a non-cash expense? ANS - Although a
non-cash expense, Depreciation is tax-deductible. Taxes are a cash expense, so Depreciation affects cash
by reducing the amount of taxes paid.
Where does Depreciation usually show up on the IS? ANS - Every company does it differently: could be
embedded in COGS or Operating Expenses. But, Depreciation always reduces Pre-Tax Income.
What happens when Inventory goes up by $10, assuming you pay for it with cash? ANS - IS: No changes
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