Exam (elaborations)
Wall Street Prep
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- Wall Street Prep Premium
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- Wall Street Prep Premium
Exam of 20 pages for the course Wall Street Prep Premium at Wall Street Prep Premium (Wall Street Prep)
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Wall Street PrepAssets - correct answer-resources a company uses to operate its business
includes cash, A/R, PP&E
Liabilities - correct answer-represents the company's contractual obligations and
includes A/P, debt, accrued expenses
Shareholder's equity - correct answer-is the residual
the value of the business available to the owners (shareholders) after debts have
been paid off
Income statement - correct answer-illustrates the profitability of the company over a
specified period of time
broad sense: shows revenue-expenses
Balance sheet - correct answer-snapshot of the company economic resources and
funding for those resources at a given point in time (A = L + SE)
Revenue - correct answer-"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 - correct answer-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 - correct answer-"bottom-line"
revenue-expenses
the profitability available to common shareholder's after debt payments have been
made (interest expense)
,EPS (earnings per share) - correct answer-portion of a company's profit allocated to
each outstanding share of common stock
EPS = (net income - dividends on preferred stock)/weighted average shares
outstanding
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
Why do capex increase assets (PP&E) while other cash outflows, like paying salary,
taxes, etc do not create any asset, and instead create an expense on the income
statement that reduces equity via retained earnings? - correct answer-Capital
expenditures are capitalized because of the timing of their estimated benefits - the
lemonade stand will benefit the firm for may years. The employee's work, on the
other hand, benefits the period in which the wages are generated and only should be
expensed then. This is what differentiates an asset from an expense.
Walk through a cash flow statement. - correct answer-Start with net income, go line
by line through major adjustments (depreciation, changes in working capital, and
deferred taxes) to arrive at cash flow from operating activities
Mention capex, asset sales, purchase of intangible assets, and purchase/sale of
investment securities to arrive at cash flow from investing activities
Mention repurchase/issuance of debt and equity and paying out dividends to arrive
at cash flow from financing activities
Adding cash flow from ops, investments and financing gets you total change in cash
beginning of period cash balance plus change in cash allows you to arrive at end of
period cash balance
What is working capital? - correct answer-Working capital is defined as current
assets minus current liabilities; it tells the financial statement user how much cash is
tied up in the business through items such as receivables and inventories and also
how much cash is going to be needed to pay off short term obligations in the next 12
months.
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