Accounting

Question 1

What must be true for something to appear on the income statement?

Answer 1

1) Must correspond to the period shown on the income statement

2) Must affect the companies taxes (i.e., be tax deductible)

Question 2

Four main sections of income statement

Answer 2

1) Revenue and COGS
2) Operating expenses
3) Other Income and Expenses
4) Taxes and Net Income

Question 3

What never appears on an income statement?

Answer 3

Capital Expenditures
Purchasing or Selling Investments and PP&E
Dividends
Issuing or repaying debt principal
Changes to Balance Sheet Items (i.e., cash, debt, accounts receivable, accounts payable)

Question 4

What is an asset?

Answer 4

An item that will result in, directly or indirectly, additional cash in the future

Question 5

What is a liability?

Answer 5

An item that will result in, directly or indirectly, less cash in the future

Question 6

How is deferred revenue recorded on the balance sheet?

Answer 6

It is a liability

Question 7

Sections of Cash Flow Statement

Answer 7

1) Cash Flow from Operations (roughly current assets and current liabilities)
2) Cash Flow from Investing (roughly long term assets)
3) Cash Flow from Financing (roughly long term liabilities and equity)

Question 8

Gains or Losses on Asset Sale on Cash Flow Statement

Answer 8

come back to this later

Question 9

How to link financial statements together?

Answer 9

1) Net income from bottom of income statement is the top of the Cash Flow Statement

2) Add back in non-cash expenses from the income statement

3) Reflect changes in operational balance sheet items (if asset goes up then cash flow goes down, if a liability goes up then cash flow goes up)

4) Reflect purchases and Sales of Investments and PP&E in Cash Flow from Investing

5) Reflect dividends, debt issued or repurchased, and shares issued or repurchased in Cash Flow from Financing

6) Calculate the net change in cash at the bottom of cash flow and then link this into cash at the top of next periods balance sheet

7) update the balance sheet to reflect changes in cash, debt equity, investments, PP&E, and anything else that comes from cash flow statement

Question 10

If a true cash item changes on the income statement

Answer 10

Pre-Tax Income and Net Income change; Cash and Retained Earnings also change

Question 11

If a non-cash items changes on the income statement

Answer 11

Pre-Tax Income and Net Income change, but you also add or subtract the charge on the cash flow statement

Cash and retained earnings will change, but something else on the balance sheet will also change

Question 12

What happens if accounts receivable goes up

Answer 12

Cash will go down (increase * tax rate)

Net Income goes up (A/R increase * (1-tax rate)

Assets go up by (A/R increase * (1-tax rate)

Liabilities go up

Question 13

If prepaid expenses go up

Answer 13

Cash goes down by that amount

Question 14

If prepaid expenses go down

Answer 14

Cash goes up (Decrease * tax rate)

Assets goes down (Decrease * (1-tax rate))

Liabilities (shareholder equity) go down (Decrease *(1-tax rate))

Question 15

If inventory goes down

Answer 15

Revenue usually goes up (ask to confirm)

Inventory goes down

COGS go up

Cash goes up (decrease * tax rate)

Retained earnings go down (decrease * (1-tax rate))

Question 16

When accrued expenses go up

Answer 16

Cash goes up (increase * tax rate)

Net Income decreases by (increase * (1-tax rate)

Accrued Expenses Increases (increase)

Owners Equity decreases (increase * (1-tax rate)

Question 17

When accounts payable goes up

Answer 17

Cash goes up (increase * tax rate)

Net Income down by (Increase * (1-tax rate))

Shareholder equity goes down by (increase * (1-tax rate))

Accounts payable increases by increase

Owners Equity decreases (increase * (1-tax rate))

Question 18

When deferred revenue goes down

Answer 18

Net income goes up (decrease * (1-tax rate))

Cash goes down (decrease * tax rate)

Shareholders equity goes up (decrease * (1-tax rate))

Deferred Revenue decreases by decrease

Shareholders equity increases by (1*(1-tax rate))

Question 19

When non-operational balance sheet items change

Answer 19

Cash and the corresponding balance sheet item change

Question 20

Where does depreciation go on the income statement?

Answer 20

It can be in COGS or in Operating Expenses, but it doesn’t really matter where you put it

Question 21

Why is the income statement not effected by inventory purchases

Answer 21

It is only recorded when the revenue associated with it is recorded

Question 22

What does non-controlling interest mean on the liabilities side of a balance sheet?

Answer 22

This is when you own over 50% but less than 100% of a company–this line item refers to the portion you DO NOT own

Question 23

What does investments in equity interest mean on the asset side of a balance sheet?

Answer 23

This is when you own over 20% but less than 50% of another company. This line item refers to the portion you DO OWN

Question 24

When would shareholder equity be negative?

Answer 24

1) In an LBO with dividend recapitalization and the owner has taken out a large portion of its equity

2) If the company has consistently lost money and has a declining retained earnings balance

Question 25

Can equity value ever be negative?

Answer 25

No

Question 26

What is operating working capital?

Answer 26

Current Assets excluding Cash and Investments - Current Liabilities excluding Debt