Wall /
Street
/ /
Prep
/ /
Accounting Questions With Correct Answers
/ // // // //
What /
/are /
/the //
3/
/financial /
/statements, /
/and /
/why /
/do /
/we /
/need /
/them? //- /
/correct /
/answer(s) /
/✔✔ /
/The //
3 //major //financial //statements //are //the //Income //Statement, //Balance //Sheet, //and //Cash //Flow
Statement.
The /
/Income /
/Statement //shows //the //company's //revenue, //expenses, //and //taxes //over //a //period //and
ends //with //Net //Income, //which //represents //the //company's //after-tax //profits.
The /
/Balance /
/Sheet //shows //the //company's //Assets //- //its //resources //- //as //well //as //how //it //paid //for //those
,resources //- /
/its //Liabilities //and //Equity //- //at //a //specific //point //in //time. //Assets //must //equal //Liabilities
plus //Equity.
The //Cash //Flow //Statement //begins //with //Net //Income, //adjusts //for //non-
cash //items //and //changes //in
operating /
/assets //and //liabilities //(working //capital), //and //then //shows //the //company's //cash //from
Investing /
/or //Financing //activities; //the //last //lines //show //the //net //change //in //cash //and //the //company's
ending //cash //balance.
You /
/need /
/these //statements //because //there //is //a //big //difference //between //a //company's //Net //Income
and /
/the //cash //it //generates //- //the //Income //Statement //alone //doesn't //tell //what //its //cash //flow //is.
Remember //the //key //valuation //formula:
Company //Value //= //Cash //Flow /// //(Discount //Rate //- //Cash //Flow //Growth //Rate)
The //
3/
/financial //statements //let //you //estimate //the //"Cash //Flow" //part, //which //helps //you //value //the
company //more //accurately.
How /
/do /
/the //
3/
/statements /
/link /
/together? //- /
/correct /
/answer(s) /
,/✔✔ //To //link //the //statements, //make //Net //Income //from //the //Income //Statement //the //top //line
//of //the //Cash
Flow //Statement.
Then, //adjust //this //Net //Income //number //for //any //non-cash //items //such //as //Depreciation //&
Amortization.
Next, /
/reflect //changes //to //operational //Balance //Sheet //items //such //as //Accounts //Receivable, //which
may //increase //or //decrease //the //company's //cash //flow //depending //on //how //they've //changed.
This //gets //you //to //Cash //Flow //from //Operations.
Next, /
/take /
/into //account //investing //and //financing //activities, //which //may //increase //or //decrease //cash
flow, /
/and /
/sum //up //Cash //Flow //from //Operations, //Investing, //and //Financing //to //get //the //net //change //in
cash //at //the //bottom.
Link /
/Cash /
/on //the //Balance //Sheet //to //the //ending //Cash //number //on //the //CFS, //and //add //Net //Income //to
Retained //Earnings //within //the //Equity //category //on //the //Balance //Sheet.
Then, //link //each //non-
cash //adjustment //to //the //appropriate //Asset //or //Liability; //SUBTRACT //links //on
the //Assets //side //and //ADD //links //on //the //L&E //side.
And /
/then //link //each //CFI //and //CFF //item //to //the //matching //item //on //the //Balance //Sheet, //using //the
//same
rule //as //above.
Check /
/that /
/Assets //equals //Liabilities //plus //Equity //at //the //end; //if //this //is //not //true, //you //did //something
, wrong //and //need //to //re-check //your //work
What's /
/the /
/most /
/important /
/financial /
/statement? //- /
/correct /
/answer(s) /
/✔✔ /
/The /
/Cash /
/Flow //Statement //is //the //most //important //single //statement //because //it //tells //you //how //much
cash //
a //company //is //generating. //The //Income //Statement //is //misleading //because //it //includes //non-
cash
revenue //and //expenses //and //excludes //cash //spending //such //as //Capital //Expenditures.
What /
/if //you //could //use //only //2 //statements //to //assess //a //company's //prospects //- //which //ones
would /
/you /
/use, /
/and /
/why? //- /
/correct /
/answer(s) /
/✔✔ /
/You /
/would /
/use //the //Income //Statement //and //Balance //Sheet //because //you //can //create //the //Cash //Flow
Statement /
/from //both //of //those //(assuming //there //are //"Beginning" //and //"Ending" //Balance //Sheets
Street
/ /
Prep
/ /
Accounting Questions With Correct Answers
/ // // // //
What /
/are /
/the //
3/
/financial /
/statements, /
/and /
/why /
/do /
/we /
/need /
/them? //- /
/correct /
/answer(s) /
/✔✔ /
/The //
3 //major //financial //statements //are //the //Income //Statement, //Balance //Sheet, //and //Cash //Flow
Statement.
The /
/Income /
/Statement //shows //the //company's //revenue, //expenses, //and //taxes //over //a //period //and
ends //with //Net //Income, //which //represents //the //company's //after-tax //profits.
The /
/Balance /
/Sheet //shows //the //company's //Assets //- //its //resources //- //as //well //as //how //it //paid //for //those
,resources //- /
/its //Liabilities //and //Equity //- //at //a //specific //point //in //time. //Assets //must //equal //Liabilities
plus //Equity.
The //Cash //Flow //Statement //begins //with //Net //Income, //adjusts //for //non-
cash //items //and //changes //in
operating /
/assets //and //liabilities //(working //capital), //and //then //shows //the //company's //cash //from
Investing /
/or //Financing //activities; //the //last //lines //show //the //net //change //in //cash //and //the //company's
ending //cash //balance.
You /
/need /
/these //statements //because //there //is //a //big //difference //between //a //company's //Net //Income
and /
/the //cash //it //generates //- //the //Income //Statement //alone //doesn't //tell //what //its //cash //flow //is.
Remember //the //key //valuation //formula:
Company //Value //= //Cash //Flow /// //(Discount //Rate //- //Cash //Flow //Growth //Rate)
The //
3/
/financial //statements //let //you //estimate //the //"Cash //Flow" //part, //which //helps //you //value //the
company //more //accurately.
How /
/do /
/the //
3/
/statements /
/link /
/together? //- /
/correct /
/answer(s) /
,/✔✔ //To //link //the //statements, //make //Net //Income //from //the //Income //Statement //the //top //line
//of //the //Cash
Flow //Statement.
Then, //adjust //this //Net //Income //number //for //any //non-cash //items //such //as //Depreciation //&
Amortization.
Next, /
/reflect //changes //to //operational //Balance //Sheet //items //such //as //Accounts //Receivable, //which
may //increase //or //decrease //the //company's //cash //flow //depending //on //how //they've //changed.
This //gets //you //to //Cash //Flow //from //Operations.
Next, /
/take /
/into //account //investing //and //financing //activities, //which //may //increase //or //decrease //cash
flow, /
/and /
/sum //up //Cash //Flow //from //Operations, //Investing, //and //Financing //to //get //the //net //change //in
cash //at //the //bottom.
Link /
/Cash /
/on //the //Balance //Sheet //to //the //ending //Cash //number //on //the //CFS, //and //add //Net //Income //to
Retained //Earnings //within //the //Equity //category //on //the //Balance //Sheet.
Then, //link //each //non-
cash //adjustment //to //the //appropriate //Asset //or //Liability; //SUBTRACT //links //on
the //Assets //side //and //ADD //links //on //the //L&E //side.
And /
/then //link //each //CFI //and //CFF //item //to //the //matching //item //on //the //Balance //Sheet, //using //the
//same
rule //as //above.
Check /
/that /
/Assets //equals //Liabilities //plus //Equity //at //the //end; //if //this //is //not //true, //you //did //something
, wrong //and //need //to //re-check //your //work
What's /
/the /
/most /
/important /
/financial /
/statement? //- /
/correct /
/answer(s) /
/✔✔ /
/The /
/Cash /
/Flow //Statement //is //the //most //important //single //statement //because //it //tells //you //how //much
cash //
a //company //is //generating. //The //Income //Statement //is //misleading //because //it //includes //non-
cash
revenue //and //expenses //and //excludes //cash //spending //such //as //Capital //Expenditures.
What /
/if //you //could //use //only //2 //statements //to //assess //a //company's //prospects //- //which //ones
would /
/you /
/use, /
/and /
/why? //- /
/correct /
/answer(s) /
/✔✔ /
/You /
/would /
/use //the //Income //Statement //and //Balance //Sheet //because //you //can //create //the //Cash //Flow
Statement /
/from //both //of //those //(assuming //there //are //"Beginning" //and //"Ending" //Balance //Sheets
