Wall Street 400 Guide Exam Questions
and Answers45
If you could look at 2 statements, which two would you use and why? - ANSWERS-Then you
would pick the income statement and balance sheet because you can create the CFS from both
of them (assuming you have "before" and "after" versions of balance sheet corresponding to
period income statement tracks
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 40% tax rate, net
income would go down by $6 because of reduced tax expense
CFS: net income at top goes down by $6, but $10 depreciation is a non-cash expense that gets
added back, so overall cash flow from operations goes up by $4. There are no changes
elsewhere, so the overall net change in cash goes up by $4.
BS: PP&E goes down by $10 on assets side because of depreciation, and cash is up by $4 from
changes on CFS
Overall: assets is down by $6. Since net income fell by $6 as well, shareholders' equity is down
by $6 and both sides of the balance sheet balance.
*Remember that an asset going up decreases your cash flow, whereas a liability going up
increases your cash flow
If Depreciation is a non-cash expense, why does it affect the cash balance? - ANSWERS-Because
it is tax-deductibale. Since taxes are a cash expense, depreciation affects cash by reducing taxes.
,Where does depreciation usually show up on the income statement? - ANSWERS-It could be in a
separate line item, or it could be embedded in COGS or operating expenses. Every company
does it differently.
*End result for accounting questions is the same: depreciation always reduces pre-tax income
What happens when accrued compensation goes up by $10? - ANSWERS-*assume accrued
compensation now being recognized as an expense (as opposed to just changing non-accrued to
accrued compensation)
Operating expenses on income statement go up by $10, pre-tax income galls by $10, and net
income falls by $6 (assuming 40% tax rate).
On CFS, net income down by $6, accrued compensation will increase cash flow by $10, so
overall cash flow from operations is up by $4 and net change in cash at the bottom is up by $4.
On BS, cash up by $4 as a result, so assets are up by $4. On liabilities/equity side, accrued
compensation is a liability so liabilities are up by 10 and retained earnings are down by $6 due
to the net income, so both sides balance.
What happens when inventory goes up by $10, assuming you pay for it with cash? - ANSWERS-
No changes to IS.
On cash flow statement, inventory is an asset so that decreases your cash flow from operations,
which goes down by $10, as does net change in cash at the bottom.
On balance sheet under assets, inventory up by $10 but cash is down by $10, so changes cancel
out and assets still equals liabilities & shareholders' equity.
Why is the income statement not affected by changes in inventory? - ANSWERS-*This is a
common interview mistake, incorrectly stating that working capital changes show up on income
statement.
,In the case of inventory, the expense is only recorded when the goods associated with it are
sold. So if it's just sitting in a warehouse, it does not count as a cost of good sold or operating
expense 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-No changes yet to IS
at start of year 1.
On CFS, additional investment in factories would show up under cash flow from investing as a
net reduction in cash flow of $100 so far. But the additional $100 worth of debt raised would
show up as an addition to cash flow, canceling out investment activity. So cash number stays the
same.
On BS there is now $100 worth of factories in PP&E, so assets is up by $100. On the other side,
debt is up by $100 as well so both sides balance
Now going out 1 year to start of year 2. Assume 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% per year.
What happens? - ANSWERS-Apple must pay interest expense and must record the depreciation.
Operating income would decrease by $10 due to the 10% depreciation charge each year, and
the $10 in interest expense would decrease pre tax income by $20 altogether.
Assuming 40% tax rate, net income would fall by $12 (20-20*.4)
On CFS, net income at top is down by $12. Depreciation is a non-cash expense, so you add it
back and the end result is that cash flow from operations is down by $2.
That's only change on CFS, so overall cash is down by $2.
On BS, under assets, cash down $2, PP&E down $10 from depreciation, so assets are down by
$12 total.
On other side, since net income was down by $12, shareholders' equity is also down by $12 and
both sides balance.
, *Remember, debt number under liabilities does not change since we've assumed none of the
debt is actually 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 also be paid back now. Walk me through the 3 statements. -
ANSWERS-After 2 years, the value of the factories is now $80 if we go with the 10% depreciation
per year assumption. It is this $80 that we will write down in the 3 statements.
On IS, $80 write-down shows up in pre-tax income line. With 40% tax rate net income declines
by $48.
On the CFS, net income down $48 but write-down is a non-cash expense, so we add it back, and
cash flow from operations increases by $32.
No changes under cash flow from investing, but under cash flow from financing there is a $100
charge for the loan payback, so cash flow from investing falls by $100.
Thus, overall net change in cash falls by $68.
BS: cash down by $68 and PP&E down by $80, so assets decreased by $148.
On other side, debt down $100 since it was paid off, and since net income dropped by $48,
shareholders' equity down by $48 as well. Liabilities and shareholders' equity down by $148 so
both sides balance.
Now looking at a different scenario, assume Apple is ordering $10 of additional Ipod inventory
using cash on hand. They order inventory but have not manufactured or sold anything yet.
What happens to 3 statements? - ANSWERS-IS: no changes
Walk me through the three financial statements - ANSWERS-"The 3 major financial statements
are the income statement, balance sheet, and cash flow statement.
The income statement gives the companies revenue and expenses, and goes down to net
income, the final line on the statement.
and Answers45
If you could look at 2 statements, which two would you use and why? - ANSWERS-Then you
would pick the income statement and balance sheet because you can create the CFS from both
of them (assuming you have "before" and "after" versions of balance sheet corresponding to
period income statement tracks
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 40% tax rate, net
income would go down by $6 because of reduced tax expense
CFS: net income at top goes down by $6, but $10 depreciation is a non-cash expense that gets
added back, so overall cash flow from operations goes up by $4. There are no changes
elsewhere, so the overall net change in cash goes up by $4.
BS: PP&E goes down by $10 on assets side because of depreciation, and cash is up by $4 from
changes on CFS
Overall: assets is down by $6. Since net income fell by $6 as well, shareholders' equity is down
by $6 and both sides of the balance sheet balance.
*Remember that an asset going up decreases your cash flow, whereas a liability going up
increases your cash flow
If Depreciation is a non-cash expense, why does it affect the cash balance? - ANSWERS-Because
it is tax-deductibale. Since taxes are a cash expense, depreciation affects cash by reducing taxes.
,Where does depreciation usually show up on the income statement? - ANSWERS-It could be in a
separate line item, or it could be embedded in COGS or operating expenses. Every company
does it differently.
*End result for accounting questions is the same: depreciation always reduces pre-tax income
What happens when accrued compensation goes up by $10? - ANSWERS-*assume accrued
compensation now being recognized as an expense (as opposed to just changing non-accrued to
accrued compensation)
Operating expenses on income statement go up by $10, pre-tax income galls by $10, and net
income falls by $6 (assuming 40% tax rate).
On CFS, net income down by $6, accrued compensation will increase cash flow by $10, so
overall cash flow from operations is up by $4 and net change in cash at the bottom is up by $4.
On BS, cash up by $4 as a result, so assets are up by $4. On liabilities/equity side, accrued
compensation is a liability so liabilities are up by 10 and retained earnings are down by $6 due
to the net income, so both sides balance.
What happens when inventory goes up by $10, assuming you pay for it with cash? - ANSWERS-
No changes to IS.
On cash flow statement, inventory is an asset so that decreases your cash flow from operations,
which goes down by $10, as does net change in cash at the bottom.
On balance sheet under assets, inventory up by $10 but cash is down by $10, so changes cancel
out and assets still equals liabilities & shareholders' equity.
Why is the income statement not affected by changes in inventory? - ANSWERS-*This is a
common interview mistake, incorrectly stating that working capital changes show up on income
statement.
,In the case of inventory, the expense is only recorded when the goods associated with it are
sold. So if it's just sitting in a warehouse, it does not count as a cost of good sold or operating
expense 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-No changes yet to IS
at start of year 1.
On CFS, additional investment in factories would show up under cash flow from investing as a
net reduction in cash flow of $100 so far. But the additional $100 worth of debt raised would
show up as an addition to cash flow, canceling out investment activity. So cash number stays the
same.
On BS there is now $100 worth of factories in PP&E, so assets is up by $100. On the other side,
debt is up by $100 as well so both sides balance
Now going out 1 year to start of year 2. Assume 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% per year.
What happens? - ANSWERS-Apple must pay interest expense and must record the depreciation.
Operating income would decrease by $10 due to the 10% depreciation charge each year, and
the $10 in interest expense would decrease pre tax income by $20 altogether.
Assuming 40% tax rate, net income would fall by $12 (20-20*.4)
On CFS, net income at top is down by $12. Depreciation is a non-cash expense, so you add it
back and the end result is that cash flow from operations is down by $2.
That's only change on CFS, so overall cash is down by $2.
On BS, under assets, cash down $2, PP&E down $10 from depreciation, so assets are down by
$12 total.
On other side, since net income was down by $12, shareholders' equity is also down by $12 and
both sides balance.
, *Remember, debt number under liabilities does not change since we've assumed none of the
debt is actually 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 also be paid back now. Walk me through the 3 statements. -
ANSWERS-After 2 years, the value of the factories is now $80 if we go with the 10% depreciation
per year assumption. It is this $80 that we will write down in the 3 statements.
On IS, $80 write-down shows up in pre-tax income line. With 40% tax rate net income declines
by $48.
On the CFS, net income down $48 but write-down is a non-cash expense, so we add it back, and
cash flow from operations increases by $32.
No changes under cash flow from investing, but under cash flow from financing there is a $100
charge for the loan payback, so cash flow from investing falls by $100.
Thus, overall net change in cash falls by $68.
BS: cash down by $68 and PP&E down by $80, so assets decreased by $148.
On other side, debt down $100 since it was paid off, and since net income dropped by $48,
shareholders' equity down by $48 as well. Liabilities and shareholders' equity down by $148 so
both sides balance.
Now looking at a different scenario, assume Apple is ordering $10 of additional Ipod inventory
using cash on hand. They order inventory but have not manufactured or sold anything yet.
What happens to 3 statements? - ANSWERS-IS: no changes
Walk me through the three financial statements - ANSWERS-"The 3 major financial statements
are the income statement, balance sheet, and cash flow statement.
The income statement gives the companies revenue and expenses, and goes down to net
income, the final line on the statement.
