BASIC ACCOUNTING QUESTIONS
AND ANSWERS
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
AND ANSWERS
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
