WALL STREET PREP REVISION EXAM TEST QUESTIONS
AND ANSWERS MARKED A+
✔✔If the share price of a company increases by 10%, what is the balance sheet
impact? - ✔✔- There would be no BS as shareholder's equity reflects the book value of
the equity
- Equity value is the "market cap" that represents the value of a company on the open
market
- Book value of equity is the initial historical value shown on the BS
- This represents the company's residual value belonging to equity shareholders once
all of its assets are liquidated and liabilities are paid off
- Equity value typically understates the market value
✔✔Do AR get captured in the income statements - ✔✔No line in IS, but it gets captured,
if only partially, indirectly in revenue.
✔✔Why are increases in accounts receivable a cash reduction on the cash flow
statement? - ✔✔Since the CFS begins with net income and NI captures all of a
company's revenue, an increase in AR means that more customers paid on credit
during the period.
Thus a downwards adjustment to NI must occur to arrive at the ending cash balance.
✔✔What is deferred revenue? - ✔✔Liability that represents payments received but not
yet earned.
Customer has paid company, but company has not yet delivered the product.
✔✔Why are increases in accounts payable shown as an increase in cash flow? -
✔✔This would mean the company is delaying payments, and the cash is still in the
company's possession.
✔✔Which section of the CFS captures interest expense? - ✔✔CFS does not directly
capture interest expense. However, interest expense is recognized on the IS and then
gets indirectly captured in the CFO since NI is the starting line.
✔✔What happens to the three financial statements if a company initiates a dividend? -
✔✔IS: No changes to the IS. DPS below NI could show.
CFS: CFF will decrease by the dividend payout and lower the ending cash balance.
BS: Cash balance will decline by dividend amount, balanced by decrease in retained
earnings.
, ✔✔Do inventories get captured on the IS? - ✔✔No. Gets partially indirectly captures in
COGS.
✔✔How should an increase in inventory get handled on the CFS? - ✔✔Increase in
inventory reflects a use of cash (outflow).
✔✔What is the difference between LIFO and FIFO, and what are the implications on
Net Income - ✔✔
✔✔How do you calculate retained earnings for the current period? - ✔✔Current RE =
Prior RE + NI - Dividends
✔✔What does the retention ratio represent and how is it related to the dividend payout
ratio? - ✔✔
✔✔What is a proxy statement? - ✔✔The proxy statement, formally known as "Form
14A," is required to be filed before a shareholder meeting to solicit shareholder votes.
The document must disclose all relevant details regarding the matter for shareholders to
make an informed decision.
In addition, the board of directors' compensation and other notable announcements
such as changes to the company's articles of incorporation are included.
✔✔What is an 8-K? - ✔✔Material event.
Filed within four days.
Acquisition, disposal of assets, backruptcy, a tender offer, the resignation of a senior
officer or boardmember, or disclosure.
✔✔IFRS vs US GAAP - ✔✔Continued globalization
Geographic diversification of investments
Cross-border M&A activity
✔✔What do the phrases "above the line" and "below the line" mean? - ✔✔
✔✔Is EBITDA a good proxy for operating cash flow? - ✔✔While EBITDA does add back
D&A, typically the largest non-cash expense, it doesn't capture the full cash impact of
capex or working capital changes during the period.
EBITDA also doesn't adjust for SBC, although an increasingly used "adjusted EBITDA"
metric does add-back SBC. These non-cash and any non-recurring adjustments must
AND ANSWERS MARKED A+
✔✔If the share price of a company increases by 10%, what is the balance sheet
impact? - ✔✔- There would be no BS as shareholder's equity reflects the book value of
the equity
- Equity value is the "market cap" that represents the value of a company on the open
market
- Book value of equity is the initial historical value shown on the BS
- This represents the company's residual value belonging to equity shareholders once
all of its assets are liquidated and liabilities are paid off
- Equity value typically understates the market value
✔✔Do AR get captured in the income statements - ✔✔No line in IS, but it gets captured,
if only partially, indirectly in revenue.
✔✔Why are increases in accounts receivable a cash reduction on the cash flow
statement? - ✔✔Since the CFS begins with net income and NI captures all of a
company's revenue, an increase in AR means that more customers paid on credit
during the period.
Thus a downwards adjustment to NI must occur to arrive at the ending cash balance.
✔✔What is deferred revenue? - ✔✔Liability that represents payments received but not
yet earned.
Customer has paid company, but company has not yet delivered the product.
✔✔Why are increases in accounts payable shown as an increase in cash flow? -
✔✔This would mean the company is delaying payments, and the cash is still in the
company's possession.
✔✔Which section of the CFS captures interest expense? - ✔✔CFS does not directly
capture interest expense. However, interest expense is recognized on the IS and then
gets indirectly captured in the CFO since NI is the starting line.
✔✔What happens to the three financial statements if a company initiates a dividend? -
✔✔IS: No changes to the IS. DPS below NI could show.
CFS: CFF will decrease by the dividend payout and lower the ending cash balance.
BS: Cash balance will decline by dividend amount, balanced by decrease in retained
earnings.
, ✔✔Do inventories get captured on the IS? - ✔✔No. Gets partially indirectly captures in
COGS.
✔✔How should an increase in inventory get handled on the CFS? - ✔✔Increase in
inventory reflects a use of cash (outflow).
✔✔What is the difference between LIFO and FIFO, and what are the implications on
Net Income - ✔✔
✔✔How do you calculate retained earnings for the current period? - ✔✔Current RE =
Prior RE + NI - Dividends
✔✔What does the retention ratio represent and how is it related to the dividend payout
ratio? - ✔✔
✔✔What is a proxy statement? - ✔✔The proxy statement, formally known as "Form
14A," is required to be filed before a shareholder meeting to solicit shareholder votes.
The document must disclose all relevant details regarding the matter for shareholders to
make an informed decision.
In addition, the board of directors' compensation and other notable announcements
such as changes to the company's articles of incorporation are included.
✔✔What is an 8-K? - ✔✔Material event.
Filed within four days.
Acquisition, disposal of assets, backruptcy, a tender offer, the resignation of a senior
officer or boardmember, or disclosure.
✔✔IFRS vs US GAAP - ✔✔Continued globalization
Geographic diversification of investments
Cross-border M&A activity
✔✔What do the phrases "above the line" and "below the line" mean? - ✔✔
✔✔Is EBITDA a good proxy for operating cash flow? - ✔✔While EBITDA does add back
D&A, typically the largest non-cash expense, it doesn't capture the full cash impact of
capex or working capital changes during the period.
EBITDA also doesn't adjust for SBC, although an increasingly used "adjusted EBITDA"
metric does add-back SBC. These non-cash and any non-recurring adjustments must
