WALL STREET PREP QUESTIONS
AND ANSWERS
Assets.-.ans✔resources.a.company.uses.to.operate.its.business.
includes.cash,.A/R,.PP&E
Liabilities.-.ans✔represents.the.company's.contractual.obligations.and.includes.A/
P,.debt,.accrued.expenses
Shareholder's.equity.-.ans✔is.the.residual
the.value.of.the.business.available.to.the.owners.
(shareholders).after.debts.have.been.paid.off
Income.statement.-.ans✔illustrates.the.profitability.of.the.company.over.a.specified.period.
of.time
broad.sense:.shows.revenue-expenses
Balance.sheet.-.ans✔snapshot.of.the.company.economic.resources.and.funding.for.those.
resources.at.a.given.point.in.time.(A.=.L.+.SE)
Revenue.-.ans✔"top-line".
represents.the.sale.of.goods.and.services.
it.is.recorded.when.earned.
(even.though.cash.might.not.have.been.received.at.the.time.of.transaction)
Expenses.-.ans✔netted.against.revenue.to.arrive.at.net.income
COGS.(directly.associate.with.good.production),.SG&A.
(indirectly.associated.with.production),.interest.expense.
, (expense.related.to.paying.debt.holders.periodic.payments),.taxes,.depreciation.expense.
(non-
cash.expense.accounting.for.the.use.of.PP&E,.often.imbedded.within.COGS.and.SG&A)
Net.income.-.ans✔"bottom-line"
revenue-expenses
the.profitability.available.to.common.shareholder's.after.debt.payments.have.been.made.
(interest.expense)
EPS.
(earnings.per.share).-.ans✔portion.of.a.company's.profit.allocated.to.each.outstanding.sha
re.of.common.stock
EPS.=.(net.income.-.dividends.on.preferred.stock)/weighted.average.shares.outstanding
Cash.flow.statement.-.ans✔While.cash.is.not.necessarily.received.when.a.sale.occurs,.the
.income.statement.still.records.the.sale..As.a.result,.the.income.statement.captures.all.the.
economic.transactions.of.the.business.
The.cash.flow.statement.is.needed.because.the.income.statement.uses.what.is.called.accr
ual.accounting..In.accrual.accounting,.revenues.are.recorded.when.earned.regardless.of.
when.cash.is.received.(revenue.includes.sales.using.cash.and.made.on.credit.A/R)
.Since.we.also.want.to.have.a.clear.understanding.of.the.cash.position.of.a.company,.we.n
eed.the.statement.of.cash.flows.to.reconcile.the.income.statement.to.cash.inflows.and.outfl
ows.
"cash.position.of.the.company"
cash.from.operating.activities,.cash.from.investing.activities,.and.cash.from.financing.activi
ties
Cash.from.operating.activities.-.ans✔mostly.indirect.method
starts.with.net.income.and.includes.the.cash.effects.of.transactions.involved.in.calculating.
net.income..reconciliation.of.net.income..
Net.income.(income.statement).
+.non-cash.expenses
-.non-cash.gains
-.period.on.period.increases.in.working.capital.assets
+.period.on.period.increases.in.working.capital.liability.
=.CF.from.operations.
AND ANSWERS
Assets.-.ans✔resources.a.company.uses.to.operate.its.business.
includes.cash,.A/R,.PP&E
Liabilities.-.ans✔represents.the.company's.contractual.obligations.and.includes.A/
P,.debt,.accrued.expenses
Shareholder's.equity.-.ans✔is.the.residual
the.value.of.the.business.available.to.the.owners.
(shareholders).after.debts.have.been.paid.off
Income.statement.-.ans✔illustrates.the.profitability.of.the.company.over.a.specified.period.
of.time
broad.sense:.shows.revenue-expenses
Balance.sheet.-.ans✔snapshot.of.the.company.economic.resources.and.funding.for.those.
resources.at.a.given.point.in.time.(A.=.L.+.SE)
Revenue.-.ans✔"top-line".
represents.the.sale.of.goods.and.services.
it.is.recorded.when.earned.
(even.though.cash.might.not.have.been.received.at.the.time.of.transaction)
Expenses.-.ans✔netted.against.revenue.to.arrive.at.net.income
COGS.(directly.associate.with.good.production),.SG&A.
(indirectly.associated.with.production),.interest.expense.
, (expense.related.to.paying.debt.holders.periodic.payments),.taxes,.depreciation.expense.
(non-
cash.expense.accounting.for.the.use.of.PP&E,.often.imbedded.within.COGS.and.SG&A)
Net.income.-.ans✔"bottom-line"
revenue-expenses
the.profitability.available.to.common.shareholder's.after.debt.payments.have.been.made.
(interest.expense)
EPS.
(earnings.per.share).-.ans✔portion.of.a.company's.profit.allocated.to.each.outstanding.sha
re.of.common.stock
EPS.=.(net.income.-.dividends.on.preferred.stock)/weighted.average.shares.outstanding
Cash.flow.statement.-.ans✔While.cash.is.not.necessarily.received.when.a.sale.occurs,.the
.income.statement.still.records.the.sale..As.a.result,.the.income.statement.captures.all.the.
economic.transactions.of.the.business.
The.cash.flow.statement.is.needed.because.the.income.statement.uses.what.is.called.accr
ual.accounting..In.accrual.accounting,.revenues.are.recorded.when.earned.regardless.of.
when.cash.is.received.(revenue.includes.sales.using.cash.and.made.on.credit.A/R)
.Since.we.also.want.to.have.a.clear.understanding.of.the.cash.position.of.a.company,.we.n
eed.the.statement.of.cash.flows.to.reconcile.the.income.statement.to.cash.inflows.and.outfl
ows.
"cash.position.of.the.company"
cash.from.operating.activities,.cash.from.investing.activities,.and.cash.from.financing.activi
ties
Cash.from.operating.activities.-.ans✔mostly.indirect.method
starts.with.net.income.and.includes.the.cash.effects.of.transactions.involved.in.calculating.
net.income..reconciliation.of.net.income..
Net.income.(income.statement).
+.non-cash.expenses
-.non-cash.gains
-.period.on.period.increases.in.working.capital.assets
+.period.on.period.increases.in.working.capital.liability.
=.CF.from.operations.
