IB Study Guide Accounting Technical
Questions and Answers
What are the Three Main Financial Statements and what comprises them? - ANS-1.
Income Statement
Revenue-COGS= Gross Profit-Expenses= Net Income
2. Balance Sheet
Assets = Liabilities +Shareholders Equity
3. Statement of Cash Flows
Net Income + noncash expenses = Cash provided by operation activities + CF from
Investing + CF from Financing = Ending Cash
How are the three main financial statements connected? - ANS-The Net income line
gets added to retained earnings on the balance sheet. That same net income is added
to the cash flow statement. The Cash line on the balance sheet should equal the ending
cash balance on the cash flow statement.
Debt on the balance sheet is used to calculate the interest expense on the income
statement as well.
What line item is usually found on all three financial statements? - ANS-Net income
What is an Income Statement? What are the Major Line Items on it? - ANS-The Income
Statement is a financial statement that provides the profitability of a company for a given
period of time. It has a Revenue line which is recorded when the sale is incurred. It has
expenses. These include COGS which are a direct cost when goods that are
manufactured are sold. Revenue-COGS= Gross Margin and then it has SGA which are
your selling and general administrative expenses which include things like Marketing
and then Gross Margin - SGA gives you your net income.
What are the Major Line Items on the Cash Flow Statement? - ANS-1. Cash Flow from
Operations, This section includes the net income adding back non cash expenses such
as depreciation and changes in working capital
2. Cash Flow from Investment, which includes the sales or purchase for equipment and
land or any long term assets.
3. Cash flow from Financing: This includes your debt and dividend payments.
If you had to use one of the three financial statements to value a company which one
would you use and why? - ANS-I would use the cash flow statement. The Cash flow
statement in my opinion provides the best picture of the business ability to meet things
such as debt obligations in the future or pay things like dividends. On the Cash flow
statement you are able to see line items like net income and also changes of working
, capital that also give you clues into how the other financial statements are doing. Soley
from the cash flow statement you could probably determine the industry a company is in
as well for example a manufacturing company would probably be spending a lot on
CAPEX.
When should an expense appear on the Income Statement? - ANS-The expenses or
revenues during that period must have incurred in order to be recorded on the income
statement for that period.
What are non-current assets on the balance sheet? - ANS-Assets which take longer
than 12 months to be liquidated this includes things like warehouse or land.
What are Long-Term Investments on the balance sheet? - ANS-These are are
investments that are longer term and less liquid than shorter term investment but aren't
PP&E examples are illiquid securities or derivatives.
What are current assets on the balance sheet? - ANS-Anything that can be liquidated in
less than 12 months examples include accounts receivable and cash.
What is inventory on the balance sheet? - ANS-Items that have been produced but not
yet sold
What is Prepaid Expense on the balance sheet? - ANS-when a company pays for
expense that covers a longer period of time then it was for, such as paying for insurance
for 12 months all in one month.
What are Intangible Assets on the balance sheet? - ANS-This includes things like
trademarks, patents, and other intellectual property
What is Goodwill on the balance sheet? - ANS-This is typical item in an M&A deal and it
is an asset line on the balance sheet and it is the difference paid for an acquisition over
and above the fair market value of its net assets.
What is the Cash Flow Statement? - ANS-It is one of three financial reports that all
public and private companies are required to produce on a quarterly basis. It simply
shows all of the sources and uses of cash for a period of time. It also shows the
adjustment to net income to show the true cash provided for operating activities and
shows changes in non cash expenses or working capital, it also shows investing
activities, and financing activities.
What do you do if you understated depreciation by $100 dollars and discovered it the
period after?(Assume 30 % Tax Rate) - ANS-That means your depreciation is
essentially going by 100 dollars. Which means the tax on your operating income is
going to be 30 dollars lower and your net income is going to decrease by 70 dollars.
Questions and Answers
What are the Three Main Financial Statements and what comprises them? - ANS-1.
Income Statement
Revenue-COGS= Gross Profit-Expenses= Net Income
2. Balance Sheet
Assets = Liabilities +Shareholders Equity
3. Statement of Cash Flows
Net Income + noncash expenses = Cash provided by operation activities + CF from
Investing + CF from Financing = Ending Cash
How are the three main financial statements connected? - ANS-The Net income line
gets added to retained earnings on the balance sheet. That same net income is added
to the cash flow statement. The Cash line on the balance sheet should equal the ending
cash balance on the cash flow statement.
Debt on the balance sheet is used to calculate the interest expense on the income
statement as well.
What line item is usually found on all three financial statements? - ANS-Net income
What is an Income Statement? What are the Major Line Items on it? - ANS-The Income
Statement is a financial statement that provides the profitability of a company for a given
period of time. It has a Revenue line which is recorded when the sale is incurred. It has
expenses. These include COGS which are a direct cost when goods that are
manufactured are sold. Revenue-COGS= Gross Margin and then it has SGA which are
your selling and general administrative expenses which include things like Marketing
and then Gross Margin - SGA gives you your net income.
What are the Major Line Items on the Cash Flow Statement? - ANS-1. Cash Flow from
Operations, This section includes the net income adding back non cash expenses such
as depreciation and changes in working capital
2. Cash Flow from Investment, which includes the sales or purchase for equipment and
land or any long term assets.
3. Cash flow from Financing: This includes your debt and dividend payments.
If you had to use one of the three financial statements to value a company which one
would you use and why? - ANS-I would use the cash flow statement. The Cash flow
statement in my opinion provides the best picture of the business ability to meet things
such as debt obligations in the future or pay things like dividends. On the Cash flow
statement you are able to see line items like net income and also changes of working
, capital that also give you clues into how the other financial statements are doing. Soley
from the cash flow statement you could probably determine the industry a company is in
as well for example a manufacturing company would probably be spending a lot on
CAPEX.
When should an expense appear on the Income Statement? - ANS-The expenses or
revenues during that period must have incurred in order to be recorded on the income
statement for that period.
What are non-current assets on the balance sheet? - ANS-Assets which take longer
than 12 months to be liquidated this includes things like warehouse or land.
What are Long-Term Investments on the balance sheet? - ANS-These are are
investments that are longer term and less liquid than shorter term investment but aren't
PP&E examples are illiquid securities or derivatives.
What are current assets on the balance sheet? - ANS-Anything that can be liquidated in
less than 12 months examples include accounts receivable and cash.
What is inventory on the balance sheet? - ANS-Items that have been produced but not
yet sold
What is Prepaid Expense on the balance sheet? - ANS-when a company pays for
expense that covers a longer period of time then it was for, such as paying for insurance
for 12 months all in one month.
What are Intangible Assets on the balance sheet? - ANS-This includes things like
trademarks, patents, and other intellectual property
What is Goodwill on the balance sheet? - ANS-This is typical item in an M&A deal and it
is an asset line on the balance sheet and it is the difference paid for an acquisition over
and above the fair market value of its net assets.
What is the Cash Flow Statement? - ANS-It is one of three financial reports that all
public and private companies are required to produce on a quarterly basis. It simply
shows all of the sources and uses of cash for a period of time. It also shows the
adjustment to net income to show the true cash provided for operating activities and
shows changes in non cash expenses or working capital, it also shows investing
activities, and financing activities.
What do you do if you understated depreciation by $100 dollars and discovered it the
period after?(Assume 30 % Tax Rate) - ANS-That means your depreciation is
essentially going by 100 dollars. Which means the tax on your operating income is
going to be 30 dollars lower and your net income is going to decrease by 70 dollars.
