WALL STREET PREP QUESTIONS AND
ANSWERS
Assets44-44answer--resources44a44company44uses44to44operate44its44business44
includes44cash,44A/R,44PP&E
Liabilities44-44answer--
represents44the44company's44contractual44obligations44and44includes44A/
P,44debt,44accrued44expenses
Shareholder's44equity44-44answer--is44the44residual
the44value44of44the44business44available44to44the44owners44(shareholders)44after44debts4
4have44been44paid44off
Income44statement44-44answer--
illustrates44the44profitability44of44the44company44over44a44specified44period44of44time
broad44sense:44shows44revenue-expenses
Balance44sheet44-44answer--
snapshot44of44the44company44economic44resources44and44funding44for44those44resource
s44at44a44given44point44in44time44(A44=44L44+44SE)
Revenue44-44answer--"top-line"44
represents44the44sale44of44goods44and44services44
it44is44recorded44when44earned44(even44though44cash44might44not44have44been44receive
d44at44the44time44of44transaction)
Expenses44-44answer--netted44against44revenue44to44arrive44at44net44income
COGS44(directly44associate44with44good44production),44SG&A44(indirectly44associated44
with44production),44interest44expense44(expense44related44to44paying44debt44holders44pe
, riodic44payments),44taxes,44depreciation44expense44(non-
cash44expense44accounting44for44the44use44of44PP&E,44often44imbedded44within44COGS
44and44SG&A)
Net44income44-44answer--"bottom-line"
revenue-expenses
the44profitability44available44to44common44shareholder's44after44debt44payments44have44
been44made44(interest44expense)
EPS44(earnings44per44share)44-44answer--
portion44of44a44company's44profit44allocated44to44each44outstanding44share44of44common
44stock
EPS44=44(net44income44-44dividends44on44preferred44stock)/
weighted44average44shares44outstanding
Cash44flow44statement44-44answer--
While44cash44is44not44necessarily44received44when44a44sale44occurs,44the44income44stat
ement44still44records44the44sale.44As44a44result,44the44income44statement44captures44all4
4the44economic44transactions44of44the44business.
The44cash44flow44statement44is44needed44because44the44income44statement44uses44wha
t44is44called44accrual44accounting.44In44accrual44accounting,44revenues44are44recorded44
when44earned44regardless44of44when44cash44is44received44(revenue44includes44sales44u
sing44cash44and44made44on44credit44A/R)
44Since44we44also44want44to44have44a44clear44understanding44of44the44cash44position44of
44a44company,44we44need44the44statement44of44cash44flows44to44reconcile44the44income4
4statement44to44cash44inflows44and44outflows.
"cash44position44of44the44company"
cash44from44operating44activities,44cash44from44investing44activities,44and44cash44from44f
inancing44activities
Cash44from44operating44activities44-44answer--mostly44indirect44method
starts44with44net44income44and44includes44the44cash44effects44of44transactions44involved
44in44calculating44net44income.44reconciliation44of44net44income.44
Net44income44(income44statement)44
+44non-cash44expenses
-44non-cash44gains
-44period44on44period44increases44in44working44capital44assets
ANSWERS
Assets44-44answer--resources44a44company44uses44to44operate44its44business44
includes44cash,44A/R,44PP&E
Liabilities44-44answer--
represents44the44company's44contractual44obligations44and44includes44A/
P,44debt,44accrued44expenses
Shareholder's44equity44-44answer--is44the44residual
the44value44of44the44business44available44to44the44owners44(shareholders)44after44debts4
4have44been44paid44off
Income44statement44-44answer--
illustrates44the44profitability44of44the44company44over44a44specified44period44of44time
broad44sense:44shows44revenue-expenses
Balance44sheet44-44answer--
snapshot44of44the44company44economic44resources44and44funding44for44those44resource
s44at44a44given44point44in44time44(A44=44L44+44SE)
Revenue44-44answer--"top-line"44
represents44the44sale44of44goods44and44services44
it44is44recorded44when44earned44(even44though44cash44might44not44have44been44receive
d44at44the44time44of44transaction)
Expenses44-44answer--netted44against44revenue44to44arrive44at44net44income
COGS44(directly44associate44with44good44production),44SG&A44(indirectly44associated44
with44production),44interest44expense44(expense44related44to44paying44debt44holders44pe
, riodic44payments),44taxes,44depreciation44expense44(non-
cash44expense44accounting44for44the44use44of44PP&E,44often44imbedded44within44COGS
44and44SG&A)
Net44income44-44answer--"bottom-line"
revenue-expenses
the44profitability44available44to44common44shareholder's44after44debt44payments44have44
been44made44(interest44expense)
EPS44(earnings44per44share)44-44answer--
portion44of44a44company's44profit44allocated44to44each44outstanding44share44of44common
44stock
EPS44=44(net44income44-44dividends44on44preferred44stock)/
weighted44average44shares44outstanding
Cash44flow44statement44-44answer--
While44cash44is44not44necessarily44received44when44a44sale44occurs,44the44income44stat
ement44still44records44the44sale.44As44a44result,44the44income44statement44captures44all4
4the44economic44transactions44of44the44business.
The44cash44flow44statement44is44needed44because44the44income44statement44uses44wha
t44is44called44accrual44accounting.44In44accrual44accounting,44revenues44are44recorded44
when44earned44regardless44of44when44cash44is44received44(revenue44includes44sales44u
sing44cash44and44made44on44credit44A/R)
44Since44we44also44want44to44have44a44clear44understanding44of44the44cash44position44of
44a44company,44we44need44the44statement44of44cash44flows44to44reconcile44the44income4
4statement44to44cash44inflows44and44outflows.
"cash44position44of44the44company"
cash44from44operating44activities,44cash44from44investing44activities,44and44cash44from44f
inancing44activities
Cash44from44operating44activities44-44answer--mostly44indirect44method
starts44with44net44income44and44includes44the44cash44effects44of44transactions44involved
44in44calculating44net44income.44reconciliation44of44net44income.44
Net44income44(income44statement)44
+44non-cash44expenses
-44non-cash44gains
-44period44on44period44increases44in44working44capital44assets
