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Accounting questions For IB Technicals (rated 100% correct).
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Accounting questions For IB Technicals(rated 100% correct).
Walk me through the 3 Financial Statements? ANS - The 3 major financial statements are the Income
Statement, Balance Sheet and Cash Flow Statement.
The Income Statement shows the company's revenue and expenses over a period of time, and goes
down to Net Income, the final line on the statement.
The Balance Sheet shows the company's Assets - its resources - such as Cash, Inventory and PP&E, as
well as its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity - at a specific point
in time. Assets must equal Liabilities plus Shareholders' Equity.
The Cash Flow Statement begins with Net Income, adjusts for non-cash expenses and changes in
operating assets and liabilities (working capital), and then shows how the company has spent cash or
received cash from Investing or Financing activities; at the end, you see the company's net change in
cash.
How are the three main financial statements connected ANS - To tie the statements together, Net
Income from the Income Statement becomes the top line of the Cash Flow Statement.
Then, you add back any non-cash charges such as Depreciation & Amortization to this Net Income
number.
Next, changes to operational Balance Sheet items appear and either reduce or increase cash flow
depending on whether they are Assets or Liabilities and whether they go up or down. That gets you to
Cash Flow from Operations.
Now you take into account investing and financing activities and changes to items like PP&E and Debt on
the Balance Sheet; those will increase or decrease cash flow, and at the bottom, you get the net change
in cash.
On the Balance Sheet for the end of this period, Cash at the top equals the beginning Cash number
(from the start of this period), plus the net change in cash from the Cash Flow Statement.
On the other side, Net Income flows into Shareholders' Equity to make the Balance Sheet balance.
At the end, Assets must always equal Liabilities plus Equity.
Can you give examples of major line items on each of the financial statements? ANS - Income
Statement: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative) Expenses; Operating
Income; Pre-Tax Income; Net Income.
, Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts
Payable; Accrued Expenses; Debt; Shareholders' Equity.
Cash Flow Statement: Cash Flow from Operations (Net Income; Depreciation & Amortization; Stock-
Based Compensation; Changes in Operating Assets & Liabilities); Cash Flow from Investing (Capital
Expenditures, Sale of PP&E, Sale/Purchase of Investments); Cash Flow from Financing (Dividends Issued,
Debt Raised / Paid Off, Shares Issued / Repurchased)
When should an expense appear on the Income Statement? ANS - Expenses that end on the income
statement must be tax deductible and must have been incurred during the period of the income
statement. Ex: Marketing expense, employee salaries.
What are the three components of the statement of Cash flows and Explain them. ANS - CASH FROM
OPERATIONS: Cash generated or lost through normal operations, sales, and changes in working capital
(more detail on working capital below).•
CASH FROM INVESTING: Cash generated or spent on investing activities; may include, for example,
capital expenditures (use of cash) or asset sales (source of cash). This section will also show any
investments in the financial markets and operating subsidiaries.NOTE: This section can explain a large
negative cash flow during the reporting period, which isn't necessarily a bad thing if it is due to large
capital expenditure in preparation for future growth.
•CASH FROM FINANCING: Cash generated or spent on financing the business; may include issuance or
repurchase of debt or equity
If you could choose only one financial statement to evaluate the financial state of a company, which
would you choose and why? ANS - I would want to see the Cash Flow Statement so I could see the
actual liquidity position of the business and how much cash it is using and generating. The Income
Statement can be misleading due to any number of non-cash expenses that may not truly be affecting
the overall business. And the balance Sheet alone just shows a snapshot of the Company at one point in
time, without showing how operations are actually performing. But whether a company has a healthy
cash balance and generates significant cash flow indicates whether it is probably financially stable, and
this is what the CF Statement would show.
Let's say I could only look at 2 statements to assess a company's prospects - which 2 would I use and
why? ANS - You would pick the Income Statement and Balance Sheet because you can create the Cash
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