BIWS 400 Exam Questions and Answers Latest Update 2025-2026
Walk me through the 3 financial statements - Answers The 3 major financial statements are
Income Statement, Balance Sheet and Cash Flow Statement.
The Income Statement gives the company's revenue and expenses, and goes down to Net
Income, the final line on the statement.
The Balance Sheet shows the company's Assets--its resource--such as Cash, Inventory, and
PP&E, as well as its Liabilities--such as Debt and Accounts Payable--and Shareholder's Equity.
Assets must equal Liabilities plus Shareholder's Equity.
The Cash Flow Statement 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 companies net change in cash.
Can you give examples of major line items on each of the financial statements? - Answers IS:
Revenue, COGS, SG&A, Operating Income, Pretax income, Net Income
BS: Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued Expenses, Debt,
Shareholders Equity
Cash Flow Statement: Net Income, Depreciation and Amortization, Stock-Based Compensation,
Changes in Operating Assets & Liabilities, CFO, Capital Expenditures, CFI, Sale/Purchase of
Securities, Dividends Issued, Cash Flow from Financing.
How do the 3 statements link together? - Answers Net Income from the Income Statement
flows into Shareholder's Equity on the Balance Sheet, and into the top line of the Cash Flow
statement.
Changes to Balance sheet items appear as working capital changes on the Cash Flow
statement, and investing and financing activities affect Balance Sheet items such as PP&E, Debt
and Shareholder's Equity. The Cash and Shareholder's Equity items on the Balance Sheet act as
"plugs" with Cash flowing in from the final line on the Cash Flow Statement.
If I were stranded on a desert island, only had 1 statement and I wanted to review the overall
health of a company - which statement would I use and why? - Answers You would use the Cash
Flow Statement because it gives a true picture of how much cash the company is actually
generating, independent of all the non-cash expenses you might have. And that's the #1 thing
you care about when analyzing the overall financial health of any business - its cash flow.
Let's say I could only look at 2 statements to assess a company's prospects - which 2 would I
use and why? - Answers You would pick the Income Statement and Balance Sheet, because you
can create the Cash Flow Statement from both of those (assuming, of course that you have
"before" and "after" versions of the Balance Sheet that correspond to the same period the
,Income Statement is tracking).
Walk me through how Depreciation going up by $10 would affect the statements. - Answers
Income Statement: Operating income would decline by $10, and assuming a tax rate of 21%, Net
income would decline by $7.90.
CFS: Net Income at the top should decline by $7.90, but the $10 Depreciation is a non-cash
expense that gets added back, so overall CFO goes up by $2.10. There are no changes
elsewhere, so overall Net Change in Cash goes up by $2.10.
BS: PPE goes down by $10 in Assets bc of Depreciation, and Cash is up by $2.10 from changes
on the CFS.
Overall, Assets is down by $7.90. Since Net income decreased by $7.90 as well, S/E on the
Liabilities&S/E is down by $7.90 and the BS is balanced.
If Depreciation is a non-cash expense, why does it affect the cash balance? - Answers
Depreciation is a non-cash expense, but it is tax-deductible. Since taxes are a cash expense,
Depreciation affects cash by reducing the amount of taxes you pay.
Where does Depreciation usually show up on the Income Statement? - Answers It can be in a
separate line item, or it could be embedded in COGS or Operating Expenses--every company will
do it differently. (But Depreciation always reduced Pre-tax income.)
What happens when Accrued Compensation goes up by $10? - Answers (First confirm that
accrued compensation is now being recognized as an expense (as opposed to just changing
non-accrued to accrued compensation). Assuming that's the case:
OpEx on IS goes up by $10, Pre-tax income falls by $10, and NI falls by $7.90 (21% tax rate)
CFS: NI is down by $7.90, and Accrued Compensation will increase cash flow by $10, so overall
CFO is up by $2.10, and the net change in cash at the bottom is $2.10.
BS: Cash is up by $2.10, so Assets are up by $2.10. On L&E side, Accrued Comp is a liability so
Liabilities are up by $10 and R/E are down by $7.90 due to NI, so it balances.
What happens when Inventory goes up by $10, assuming you pay for it with cash? - Answers No
changes to Income Statement.
CFS: Inventory is an asset so that decreases CFO by $10, thus same with net change in cash.
BS: Inventory(A) is up by $10 but Cash(A) is down by $10, so it balances.
Why is the Income Statement not affected by changes in Inventory? - Answers The expense is
only recorded when the goods associated with it are sold, so if it's just sitting in a warehouse, it
doesn't count as COGS or OpEx until the company manufactures it into a product and sells it.
,Let's say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements
affected at the start of "Year 1," before anything else happens? - Answers IS: At the start of year
1 there are no changes to the IS.
CFS: The additional investments in factories would show up under CFI as a net reduction in CF
by $100. The additional $100 of debt raised would show up as an addition to CF, cancelling out
the investments activity, sot NCIC is the same.
BS: PPE(A) goes up by $100 and Debt(L) goes up by $100, so it balances.
Now let's go out 1 year to the start of year 2. Assume the debt is high-yield so no principal is
paid off, and assume an interest rate of 10%. Also assume factories depreciate at a rate of
10%/year. What happens? - Answers After a year Apple must pay interest expense and record
the depreciation.
IS: OpIn decreases by $10 dues to 10% depreciation, and the additional $10 in interest expense
would decrease the pre-tax income by $20 altogether. ($10 from depreciation and $10 from
Interest)
With a tax rate of %21, NI falls by $15.80 (79% of 20).
CFS: Ni at the top is down by $12. Depreciation is a non-cash expense, so you add it back and
the end result is CFO is down by $5.80. NCIC is $5.80.
BS: Cash(A) is down by $5.80 and PPE(A) is down by $10 (depreciation). S/E is down by $15.80
due to NI, so both sides balance.
(Debt under liabilities doesn't change bc we assume it's not paid back)
At the start of Year 3, the factories all break down and the value of the equipment is written
down to $0. The loan must all be paid back now. What happens? - Answers After 2 years, the
value of the factories is now $80 due to deprecation. So this $80 is what we write down.
IS: $80 write-down shows up on pre-tax income. With 21% tax rate, NI decreases by $63.20
(79%*$80)
CFS: Ni is down by $63.20, but the write-down is a non-cash expense, so we add it back--thus
CFO is up by $16.80.
There are no changes under CFI, but under CFF there is $100 decrease from the loan payback,
so NCIC is $83.20.
BS: Cash(A) is now down by $83.20 and PPE(A) is down by $80, so Assets are down by $163.20
overall.
Debt(L) is down by $100 bc it was paid off, and since NI was down by $63.20, S/E is down by
$63.20 as well. Overall, L&S/E is down by $163.20, and both sides balance.
, Now let's look at a different scenario and assume Apple is ordering $10 of additional iPod
inventory using cash on hand. They order the inventory, but they have not manufactured or sold
anything yet--what happens to the statements? - Answers IS: No change
CFS: Inventory is up by $10, thus CFO decreases by $10. NCIC is down by $10.
BS: Inventory(A) s up by $10 and Cash(A) is down by $10 so it balances.
Now let's say they sell the iPods for revenue of $20, at a cost of $10. Walk me through the 3
statements under this scenario. - Answers IS: Revenue is up by $20 and COGS is up by $10, so
Gross Profit is up by $10 and so is Operating Income. With a 21% tax rate, NI is up by $7.90
CFS: NI is up by $7.90 and Inventory has degreased by $10, which is an addition to CF, so CFO is
up $17.90 overall.
NCIC is $17.90
BS: Cash(A) is up by $17.90 and Inventory(A) is down by $10, so Assets are up $7.90. Ni was up
by $7.90, so so is S/E, and both sides balance.
Could you ever end up with negative S/E? What does that mean? - Answers Yes, it is common to
see this in 2 scenarios:
1. LBOs with dividend recapitalizations--it means that the owner of the company has taken out a
large portion of its equity(usually in the form of cash), which can sometimes turn the number
negative
2. It can also happen if the company has been losing money consistently and therefore has a
declining R/E balance, which is a portion of S/E
It doesn't mean anything in particular, but it can be cause for concern and possibly demonstrate
that the company is struggling (in the second scenario)
(S/E never turns negative immediately after an LBO--it would only happen following a dividend
recap or continued net losses)
What is working capital? How is it used? - Answers Working Capital = Current Assets - Current
Liabilities
If it's positive, it means a company can pay off its short term liabilities with its short term assets.
It is often presented as a financial metric and its magnitude and sign (+ or -) tells you whether or
not the company is sound.
Bankers look at Operating Working Capital more commonly in models, and that is defined as
(Current Assets - Cash and Cash Equivalents)-(Current Liabilities - Debt)
What does negative Working Capital mean? Is that a bad sign? - Answers Not necessarily. It
Walk me through the 3 financial statements - Answers The 3 major financial statements are
Income Statement, Balance Sheet and Cash Flow Statement.
The Income Statement gives the company's revenue and expenses, and goes down to Net
Income, the final line on the statement.
The Balance Sheet shows the company's Assets--its resource--such as Cash, Inventory, and
PP&E, as well as its Liabilities--such as Debt and Accounts Payable--and Shareholder's Equity.
Assets must equal Liabilities plus Shareholder's Equity.
The Cash Flow Statement 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 companies net change in cash.
Can you give examples of major line items on each of the financial statements? - Answers IS:
Revenue, COGS, SG&A, Operating Income, Pretax income, Net Income
BS: Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued Expenses, Debt,
Shareholders Equity
Cash Flow Statement: Net Income, Depreciation and Amortization, Stock-Based Compensation,
Changes in Operating Assets & Liabilities, CFO, Capital Expenditures, CFI, Sale/Purchase of
Securities, Dividends Issued, Cash Flow from Financing.
How do the 3 statements link together? - Answers Net Income from the Income Statement
flows into Shareholder's Equity on the Balance Sheet, and into the top line of the Cash Flow
statement.
Changes to Balance sheet items appear as working capital changes on the Cash Flow
statement, and investing and financing activities affect Balance Sheet items such as PP&E, Debt
and Shareholder's Equity. The Cash and Shareholder's Equity items on the Balance Sheet act as
"plugs" with Cash flowing in from the final line on the Cash Flow Statement.
If I were stranded on a desert island, only had 1 statement and I wanted to review the overall
health of a company - which statement would I use and why? - Answers You would use the Cash
Flow Statement because it gives a true picture of how much cash the company is actually
generating, independent of all the non-cash expenses you might have. And that's the #1 thing
you care about when analyzing the overall financial health of any business - its cash flow.
Let's say I could only look at 2 statements to assess a company's prospects - which 2 would I
use and why? - Answers You would pick the Income Statement and Balance Sheet, because you
can create the Cash Flow Statement from both of those (assuming, of course that you have
"before" and "after" versions of the Balance Sheet that correspond to the same period the
,Income Statement is tracking).
Walk me through how Depreciation going up by $10 would affect the statements. - Answers
Income Statement: Operating income would decline by $10, and assuming a tax rate of 21%, Net
income would decline by $7.90.
CFS: Net Income at the top should decline by $7.90, but the $10 Depreciation is a non-cash
expense that gets added back, so overall CFO goes up by $2.10. There are no changes
elsewhere, so overall Net Change in Cash goes up by $2.10.
BS: PPE goes down by $10 in Assets bc of Depreciation, and Cash is up by $2.10 from changes
on the CFS.
Overall, Assets is down by $7.90. Since Net income decreased by $7.90 as well, S/E on the
Liabilities&S/E is down by $7.90 and the BS is balanced.
If Depreciation is a non-cash expense, why does it affect the cash balance? - Answers
Depreciation is a non-cash expense, but it is tax-deductible. Since taxes are a cash expense,
Depreciation affects cash by reducing the amount of taxes you pay.
Where does Depreciation usually show up on the Income Statement? - Answers It can be in a
separate line item, or it could be embedded in COGS or Operating Expenses--every company will
do it differently. (But Depreciation always reduced Pre-tax income.)
What happens when Accrued Compensation goes up by $10? - Answers (First confirm that
accrued compensation is now being recognized as an expense (as opposed to just changing
non-accrued to accrued compensation). Assuming that's the case:
OpEx on IS goes up by $10, Pre-tax income falls by $10, and NI falls by $7.90 (21% tax rate)
CFS: NI is down by $7.90, and Accrued Compensation will increase cash flow by $10, so overall
CFO is up by $2.10, and the net change in cash at the bottom is $2.10.
BS: Cash is up by $2.10, so Assets are up by $2.10. On L&E side, Accrued Comp is a liability so
Liabilities are up by $10 and R/E are down by $7.90 due to NI, so it balances.
What happens when Inventory goes up by $10, assuming you pay for it with cash? - Answers No
changes to Income Statement.
CFS: Inventory is an asset so that decreases CFO by $10, thus same with net change in cash.
BS: Inventory(A) is up by $10 but Cash(A) is down by $10, so it balances.
Why is the Income Statement not affected by changes in Inventory? - Answers The expense is
only recorded when the goods associated with it are sold, so if it's just sitting in a warehouse, it
doesn't count as COGS or OpEx until the company manufactures it into a product and sells it.
,Let's say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements
affected at the start of "Year 1," before anything else happens? - Answers IS: At the start of year
1 there are no changes to the IS.
CFS: The additional investments in factories would show up under CFI as a net reduction in CF
by $100. The additional $100 of debt raised would show up as an addition to CF, cancelling out
the investments activity, sot NCIC is the same.
BS: PPE(A) goes up by $100 and Debt(L) goes up by $100, so it balances.
Now let's go out 1 year to the start of year 2. Assume the debt is high-yield so no principal is
paid off, and assume an interest rate of 10%. Also assume factories depreciate at a rate of
10%/year. What happens? - Answers After a year Apple must pay interest expense and record
the depreciation.
IS: OpIn decreases by $10 dues to 10% depreciation, and the additional $10 in interest expense
would decrease the pre-tax income by $20 altogether. ($10 from depreciation and $10 from
Interest)
With a tax rate of %21, NI falls by $15.80 (79% of 20).
CFS: Ni at the top is down by $12. Depreciation is a non-cash expense, so you add it back and
the end result is CFO is down by $5.80. NCIC is $5.80.
BS: Cash(A) is down by $5.80 and PPE(A) is down by $10 (depreciation). S/E is down by $15.80
due to NI, so both sides balance.
(Debt under liabilities doesn't change bc we assume it's not paid back)
At the start of Year 3, the factories all break down and the value of the equipment is written
down to $0. The loan must all be paid back now. What happens? - Answers After 2 years, the
value of the factories is now $80 due to deprecation. So this $80 is what we write down.
IS: $80 write-down shows up on pre-tax income. With 21% tax rate, NI decreases by $63.20
(79%*$80)
CFS: Ni is down by $63.20, but the write-down is a non-cash expense, so we add it back--thus
CFO is up by $16.80.
There are no changes under CFI, but under CFF there is $100 decrease from the loan payback,
so NCIC is $83.20.
BS: Cash(A) is now down by $83.20 and PPE(A) is down by $80, so Assets are down by $163.20
overall.
Debt(L) is down by $100 bc it was paid off, and since NI was down by $63.20, S/E is down by
$63.20 as well. Overall, L&S/E is down by $163.20, and both sides balance.
, Now let's look at a different scenario and assume Apple is ordering $10 of additional iPod
inventory using cash on hand. They order the inventory, but they have not manufactured or sold
anything yet--what happens to the statements? - Answers IS: No change
CFS: Inventory is up by $10, thus CFO decreases by $10. NCIC is down by $10.
BS: Inventory(A) s up by $10 and Cash(A) is down by $10 so it balances.
Now let's say they sell the iPods for revenue of $20, at a cost of $10. Walk me through the 3
statements under this scenario. - Answers IS: Revenue is up by $20 and COGS is up by $10, so
Gross Profit is up by $10 and so is Operating Income. With a 21% tax rate, NI is up by $7.90
CFS: NI is up by $7.90 and Inventory has degreased by $10, which is an addition to CF, so CFO is
up $17.90 overall.
NCIC is $17.90
BS: Cash(A) is up by $17.90 and Inventory(A) is down by $10, so Assets are up $7.90. Ni was up
by $7.90, so so is S/E, and both sides balance.
Could you ever end up with negative S/E? What does that mean? - Answers Yes, it is common to
see this in 2 scenarios:
1. LBOs with dividend recapitalizations--it means that the owner of the company has taken out a
large portion of its equity(usually in the form of cash), which can sometimes turn the number
negative
2. It can also happen if the company has been losing money consistently and therefore has a
declining R/E balance, which is a portion of S/E
It doesn't mean anything in particular, but it can be cause for concern and possibly demonstrate
that the company is struggling (in the second scenario)
(S/E never turns negative immediately after an LBO--it would only happen following a dividend
recap or continued net losses)
What is working capital? How is it used? - Answers Working Capital = Current Assets - Current
Liabilities
If it's positive, it means a company can pay off its short term liabilities with its short term assets.
It is often presented as a financial metric and its magnitude and sign (+ or -) tells you whether or
not the company is sound.
Bankers look at Operating Working Capital more commonly in models, and that is defined as
(Current Assets - Cash and Cash Equivalents)-(Current Liabilities - Debt)
What does negative Working Capital mean? Is that a bad sign? - Answers Not necessarily. It
