WSP ACCOUNTING Technicals| EXAM QUESTIONS
WITH ANSWERS VERIFIED 100% CORRECT|
Walk me through the three financial statements. - ✔✔1. Income Statement ("IS"):
The income statement shows a company's profitability over a specified period, typically
quarterly and annually. The beginning line item is revenue and upon deducting various
costs and expenses, the ending line item is net income.
2. Balance Sheet ("BS"): The balance sheet is a snapshot of a company's resources
(assets) and sources of funding (liabilities and shareholders' equity) at a specific point in
time, such as the end of a quarter or fiscal year.
3. Cash Flow Statement ("CFS"): Under the indirect approach, the starting line item is
net income, which will be adjusted for non-cash items such as D&A and changes in
working capital to arrive at cash from operations. Cash from investing and financing
activities are then added to cash from operations to arrive at the net change in cash,
which represents the actual cash inflows/(outflows) in a given period.
Walk me through the income statement. - ✔✔The income statement shows a
company's accrual-based profitability over a specified time period and facilitates the
analysis of its historical growth and operational performance. The table below lists the
major income and expense components of the income statement:
Walk me through the balance sheet. - ✔✔The balance sheet shows a company's
assets, liabilities, and equity sections at a specific point in time. The fundamental
accounting equation is: Assets = Liabilities + Shareholders' Equity. The assets belonging
to a company must have been funded somehow, so assets will always be equal to the
sum of liabilities and equity.
,Assets Section: Assets are organized in the order of liquidity, with "Current Assets" being
assets that can be converted into cash within a year, such as cash itself, along with
marketable securities, accounts receivable, prepaid expenses, and inventories. "Long-
Term Assets" include property, plant, and equipment (PP&E), intangible assets,
goodwill, and long-term investments.
Liabilities Section: Liabilities are listed in the order of how close they're to coming due.
"Current Liabilities" include accounts payable, accrued expenses, and short-term debt,
while "Long-Term Liabilities" include items such as long-term debt, deferred revenue,
and deferred income taxes.
Shareholders' Equity Section: The equity section consists of common stock, additional
paid-in capital (APIC), treasury stock, and retained earnings
Could you give further context on what assets, liabilities, and equity each represent? -
✔✔Assets: Assets are resources with economic value that can be sold for money or
bring positive monetary benefits in the future. For example, cash and marketable
securities are a store of monetary value that can be invested to earn interest/returns,
accounts receivable are payments due from customers, and PP&E is used to generate
cash flows in the future - all representing inflows of cash.
Liabilities: Liabilities are unsettled obligations to another party in the future and
represent the external sources of capital from third-parties, which help fund the
company's assets (e.g., debt capital, payments owed to suppliers/vendors). Unlike
assets, liabilities represent future outflows of cash.
Equity: Equity is the capital invested in the business and represents the internal sources
of capital that helped fund its assets. The providers of capital could range from being
self-funded to outside institutional investors. In addition, the accumulated net profits
over time will be shown here as "Retained Earnings."
,Walk me through the cash flow statement - ✔✔There are two methods by which
cash flow statements are organized: Direct and Indirect. The more common approach is
the indirect method, whereby the cash flow statement is broken out into three sections:
1. Cash from Operations: The cash from operations section starts with net income and
adds back non-cash expenses such as depreciation & amortization and stock-based
compensation, and then makes adjustments for changes in working capital.
2. Cash from Investing: Next, the cash from investing section accounts for capital
expenditures (typically the largest outflow), followed by any business acquisitions or
divestitures.
3. Cash from Financing: In the third section, cash from financing shows the net cash
impact of raising capital from issuances of equity or debt, net of cash used for share
repurchases, and repayments of debt. The cash outflows from the payout of dividends
to shareholders will be reflected here as well.
Together, the sum of the three sections will be the net change in cash for the period.
This figure will then be added to the beginning-of-period cash balance to arrive at the
ending cash balance.
How are the three financial statements connected? - ✔✔IS ↔ CFS: The cash flow
statement is connected to the income statement through net income, as net income is
the starting line on the cash flow statement.
CFS ↔ BS: Next, the cash flow statement is linked to the balance sheet because it tracks
the changes in the balance sheet's working capital (current assets and liabilities). The
impact from capital expenditures (PP&E), debt or equity issuances, and share buybacks
(treasury stock) are also reflected on the balance sheet. In addition, the ending cash
balance from the bottom of the cash flow statement will flow to the balance sheet as
the cash balance for the current period.
, IS ↔ BS: The income statement is connected to the balance sheet through retained
earnings. Net income minus dividends issued during the period will be added to the
prior period's retained earnings balance to calculate the current period's retained
earnings. Interest expense on the income statement is also calculated off the beginning
and ending debt balances on the balance sheet, and PP&E on the balance sheet is
reduced by depreciation, which is an expense on the income statement.
If you have a balance sheet and must choose between the income statement or cash
flow statement, which would you pick? - ✔✔Assuming that I would be given both the
beginning and end of period balance sheets, I would choose the income statement since
I could reconcile the cash flow statement using the balance sheet's year-over-year
changes along with the income statement.
Which is more important, the income statement or the cash flow statement? -
✔✔The income statement and cash flow statement are both necessary, and any in-
depth analysis would require using both. However, the cash flow statement is arguably
more important because it reconciles net income, the accrual-based bottom line on the
income statement, to what is actually occurring to cash.
This means the actual movement of cash during the period is reflected on the cash flow
statement. Thus, the cash flow statement brings attention to liquidity-related issues and
investments and financing activities that don't show up on the accrual-based income
statement.
If you had to pick between either the income statement or cash flow statement to
analyze a company, which would you pick? - ✔✔In most cases, the cash flow
statement would be chosen since the cash flow statement reflects a company's true
liquidity and is not prone to the same discretionary accounting conventions used in
accrual accounting. Whether you're an equity investor or lender, a company's ability to
generate sufficient free cash flow to reinvest into its operations and meet its debt
obligations comes first. At the end of the day, "cash is king."
WITH ANSWERS VERIFIED 100% CORRECT|
Walk me through the three financial statements. - ✔✔1. Income Statement ("IS"):
The income statement shows a company's profitability over a specified period, typically
quarterly and annually. The beginning line item is revenue and upon deducting various
costs and expenses, the ending line item is net income.
2. Balance Sheet ("BS"): The balance sheet is a snapshot of a company's resources
(assets) and sources of funding (liabilities and shareholders' equity) at a specific point in
time, such as the end of a quarter or fiscal year.
3. Cash Flow Statement ("CFS"): Under the indirect approach, the starting line item is
net income, which will be adjusted for non-cash items such as D&A and changes in
working capital to arrive at cash from operations. Cash from investing and financing
activities are then added to cash from operations to arrive at the net change in cash,
which represents the actual cash inflows/(outflows) in a given period.
Walk me through the income statement. - ✔✔The income statement shows a
company's accrual-based profitability over a specified time period and facilitates the
analysis of its historical growth and operational performance. The table below lists the
major income and expense components of the income statement:
Walk me through the balance sheet. - ✔✔The balance sheet shows a company's
assets, liabilities, and equity sections at a specific point in time. The fundamental
accounting equation is: Assets = Liabilities + Shareholders' Equity. The assets belonging
to a company must have been funded somehow, so assets will always be equal to the
sum of liabilities and equity.
,Assets Section: Assets are organized in the order of liquidity, with "Current Assets" being
assets that can be converted into cash within a year, such as cash itself, along with
marketable securities, accounts receivable, prepaid expenses, and inventories. "Long-
Term Assets" include property, plant, and equipment (PP&E), intangible assets,
goodwill, and long-term investments.
Liabilities Section: Liabilities are listed in the order of how close they're to coming due.
"Current Liabilities" include accounts payable, accrued expenses, and short-term debt,
while "Long-Term Liabilities" include items such as long-term debt, deferred revenue,
and deferred income taxes.
Shareholders' Equity Section: The equity section consists of common stock, additional
paid-in capital (APIC), treasury stock, and retained earnings
Could you give further context on what assets, liabilities, and equity each represent? -
✔✔Assets: Assets are resources with economic value that can be sold for money or
bring positive monetary benefits in the future. For example, cash and marketable
securities are a store of monetary value that can be invested to earn interest/returns,
accounts receivable are payments due from customers, and PP&E is used to generate
cash flows in the future - all representing inflows of cash.
Liabilities: Liabilities are unsettled obligations to another party in the future and
represent the external sources of capital from third-parties, which help fund the
company's assets (e.g., debt capital, payments owed to suppliers/vendors). Unlike
assets, liabilities represent future outflows of cash.
Equity: Equity is the capital invested in the business and represents the internal sources
of capital that helped fund its assets. The providers of capital could range from being
self-funded to outside institutional investors. In addition, the accumulated net profits
over time will be shown here as "Retained Earnings."
,Walk me through the cash flow statement - ✔✔There are two methods by which
cash flow statements are organized: Direct and Indirect. The more common approach is
the indirect method, whereby the cash flow statement is broken out into three sections:
1. Cash from Operations: The cash from operations section starts with net income and
adds back non-cash expenses such as depreciation & amortization and stock-based
compensation, and then makes adjustments for changes in working capital.
2. Cash from Investing: Next, the cash from investing section accounts for capital
expenditures (typically the largest outflow), followed by any business acquisitions or
divestitures.
3. Cash from Financing: In the third section, cash from financing shows the net cash
impact of raising capital from issuances of equity or debt, net of cash used for share
repurchases, and repayments of debt. The cash outflows from the payout of dividends
to shareholders will be reflected here as well.
Together, the sum of the three sections will be the net change in cash for the period.
This figure will then be added to the beginning-of-period cash balance to arrive at the
ending cash balance.
How are the three financial statements connected? - ✔✔IS ↔ CFS: The cash flow
statement is connected to the income statement through net income, as net income is
the starting line on the cash flow statement.
CFS ↔ BS: Next, the cash flow statement is linked to the balance sheet because it tracks
the changes in the balance sheet's working capital (current assets and liabilities). The
impact from capital expenditures (PP&E), debt or equity issuances, and share buybacks
(treasury stock) are also reflected on the balance sheet. In addition, the ending cash
balance from the bottom of the cash flow statement will flow to the balance sheet as
the cash balance for the current period.
, IS ↔ BS: The income statement is connected to the balance sheet through retained
earnings. Net income minus dividends issued during the period will be added to the
prior period's retained earnings balance to calculate the current period's retained
earnings. Interest expense on the income statement is also calculated off the beginning
and ending debt balances on the balance sheet, and PP&E on the balance sheet is
reduced by depreciation, which is an expense on the income statement.
If you have a balance sheet and must choose between the income statement or cash
flow statement, which would you pick? - ✔✔Assuming that I would be given both the
beginning and end of period balance sheets, I would choose the income statement since
I could reconcile the cash flow statement using the balance sheet's year-over-year
changes along with the income statement.
Which is more important, the income statement or the cash flow statement? -
✔✔The income statement and cash flow statement are both necessary, and any in-
depth analysis would require using both. However, the cash flow statement is arguably
more important because it reconciles net income, the accrual-based bottom line on the
income statement, to what is actually occurring to cash.
This means the actual movement of cash during the period is reflected on the cash flow
statement. Thus, the cash flow statement brings attention to liquidity-related issues and
investments and financing activities that don't show up on the accrual-based income
statement.
If you had to pick between either the income statement or cash flow statement to
analyze a company, which would you pick? - ✔✔In most cases, the cash flow
statement would be chosen since the cash flow statement reflects a company's true
liquidity and is not prone to the same discretionary accounting conventions used in
accrual accounting. Whether you're an equity investor or lender, a company's ability to
generate sufficient free cash flow to reinvest into its operations and meet its debt
obligations comes first. At the end of the day, "cash is king."
