Wall Street Prep Exam Questions With
Solved Answers Graded A+
Cash flow statement - CORRECT ANSWER-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
accrual 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 need the statement of cash flows to reconcile the income statement to cash inflows
and outflows.
"cash position of the company"
cash from operating activities, cash from investing activities, and cash from financing
activities
Cash from operating activities - CORRECT ANSWER-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
*for stable, mature, plain vanilla companies, a positive cash flow from operating
activities is desirable
Cash from investing activities - CORRECT ANSWER-cash related to investments in the
business (additional capex or sales of assets)
for stable, mature, plain vanilla a negative cash flow from investing activities is desirable
as this indicates that the company is trying to grow by buying assets
Cash from financing activities - CORRECT ANSWER-cash related to capital raising and
payment of dividends
if the company issues more preferred stock, we will see such an increase in cash in this
section
if the company pays out dividends, we will see a cash outflow
for stable, mature plain vanilla companies, there is not a preference for positive or
negative cash flow in this section
Net change in cash over period = - CORRECT ANSWER-cash from operating activities
plus cash from investing activities plus cash from financing activities
Solved Answers Graded A+
Cash flow statement - CORRECT ANSWER-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
accrual 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 need the statement of cash flows to reconcile the income statement to cash inflows
and outflows.
"cash position of the company"
cash from operating activities, cash from investing activities, and cash from financing
activities
Cash from operating activities - CORRECT ANSWER-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
*for stable, mature, plain vanilla companies, a positive cash flow from operating
activities is desirable
Cash from investing activities - CORRECT ANSWER-cash related to investments in the
business (additional capex or sales of assets)
for stable, mature, plain vanilla a negative cash flow from investing activities is desirable
as this indicates that the company is trying to grow by buying assets
Cash from financing activities - CORRECT ANSWER-cash related to capital raising and
payment of dividends
if the company issues more preferred stock, we will see such an increase in cash in this
section
if the company pays out dividends, we will see a cash outflow
for stable, mature plain vanilla companies, there is not a preference for positive or
negative cash flow in this section
Net change in cash over period = - CORRECT ANSWER-cash from operating activities
plus cash from investing activities plus cash from financing activities
