Exam (elaborations)
Basic Accounting Questions and Answers.
- Course
- Institution
Basic Accounting Questions and Answers.
[Show more]
Seller
Follow
Content preview
Basic Accounting Questions andAnswers.
What are the 3 major financial statements? ANS - Income Statement, Balance Sheet, Cash Flow
Statement
Walk me through the Income Statement ANS - Gives the company's revenue and expenses, and goes
down to Net Income, the final line on the statement.
Walk me through the Balance Sheet ANS - Show the company's Assets (resources - Cash, Inventory,
PP&E), Liabilities (Debt and Accounts Payable) and Shareholders' Equity.
Assets must equal Liabilities plus Shareholders' Equity.
Walk me through the Cash Flow Statement ANS - Begins with Net Income, adjusts for non-cash
expenses and working capital changes, and then lists cash flow from investing and financing activities; at
the end, you see the company's net change in cash.
IS major Line items ANS - Revenue, COGS, SG&A, Operating Income, Pretax Income, Net Income
BS major line items ANS - Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued
Expenses, Debt, Shareholers' Equity
CFS major line items ANS - Net Income, Depreciation & Amortization, Stock-Based Compensation,
Changes in Operating Assets & Liabilities, Cash Flow From Operations, CapEx, Cash Flow from Investing,
Sale/Purchase of Securities, Dividends Issued, Cash Flow from Financing
How do the 3 statements link together? ANS - - Net Income from the IS flows into Shareholders' Equity
on the Balance Sheet, and into the top line of the Cash Flow Statement
- Changes to BS items appear as working capital changes on the CFS. Investing and Financing activities
affect BS items such as PP&E, Debt and Shareholders' Equity
- Cash and Shareholders' Equity items on BS act as plugs, with Cash flowing in from the final line on the
CFS
, If I wanted to review the overall health of a company and only had one statement, which statement
would I use and why? ANS - Use the CFS
- gives the true picture of how much cash the company is generating, independent of non-cash
expenses.
- cash flow is the number one concern when analyzing the overall health of a business
I could only use 2 statements - which 2? ANS - - Income Statement and Balance Sheet
- Can create the Cash Flow Statement from both (as long as you have a before and after BS for the
period the IS is tracking)
Walk me through how Depreciation going up by $10 would affect the statements. ANS - IS: Operating
income down by $10, Net Income down by $6 (40% tax rate)
CFS: NI down by $6, but $10 is non-cash and gets added back -> CFO goes up by $4. Overall net change
in cash up by $4.
BS:
- Assets: PP&E down by $10 from dep, Cash up by $4 from CFS. So, assets down by $6.
- Lia + SE: Net Income fell by $6, so SE down by $6.
- both sides down by $6 and BS balances
Why does Depreciation affect the cash balance despite being a non-cash expense? ANS - Although a
non-cash expense, Depreciation is tax-deductible. Taxes are a cash expense, so Depreciation affects cash
by reducing the amount of taxes paid.
Where does Depreciation usually show up on the IS? ANS - Every company does it differently: could be
embedded in COGS or Operating Expenses. But, Depreciation always reduces Pre-Tax Income.
What happens when Inventory goes up by $10, assuming you pay for it with cash? ANS - IS: No changes
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Professorkaylee. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.99. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67232 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now