Accounting basics Flashcards
(17 cards)
What is an income statement?
The income statement shows revenues, costs and profits of a company over a period of time. It is important because it contains some of the most basic and important metrics used to analyse a company´s profitiability
What is a balance sheet?
A balance sheet shows the financial position of a company and specifically the firm´s assets, liabilities and shareholders´equity at a given point in time. It contains key metrics used to understand and analyse a company´s financial stability and to measure book value of assets (PP&E, cash, inventory etc.).
What is a cash flow statement?
Shows the net cash flows relating to a company´s operating, investing and financing activities for a period of time corresponding to the time period of the income statement. It helps us understand how much cash a company generates or uses from its operations and lists key sources and uses of cash.
Accrual vs cash based accounting?
Accrual accounting recognises revenue when a firm sells goods or services and matches the costs associated with producing those revenues and record them at the same time. Cash based accounting recognises revenues and costs when cash is received or spent.
Advantages and disadvantages of accrual vs cash based accounting?
Accrual accounting is advantageous because revenues and costs are matched and the income statement reflects more accurate profitability than does cash based accounting. In addition it is harder to manipulate accrual accounting by timing purchases or sales.
How is EBITDA calculated?
EBITDA is earnings before interest and taxes (EBIT) or operating income plus D&A
Why is EBITDA frequently used?
EBITDA is a proxy for operating cash flow and is easy to calculate
Why does EBITDA not equal operating cash flow
EBITDA ignores many uses of cash such as CAPEX and change in working capital
In a period of inflation which method of inventory LIFO vs FIFO would result in higher levels of inventories on the balance sheet?
LIFO (last in first out) and FIFO (first in first out). LIFO assumes the last items to be put in the inventory are the first to be sold whereas FIFO is the first items in the inventory are sold first. In inflation the FIFO method will result on a larger inventory as older inventory at lower prices will be used first, leaving the value of newer inventory at higher prices on the balance sheet.
What is the difference between operating and capital lease?
In an operating lease the lessee does not take risk of ownership and the rent it pays is treated as an expense, in a capital lease the lessee does take risk of ownership and enjoys some benefits, and the lease is treated as if the company owned the property and borrowed to help finance the property.
What is a deferred tax asset or liability?
A deferred tax asset or deferred tax liability is a balance sheet item reflecting the difference between taxes reported on financial statements and taxes are actually paid to the government mostly resulting from timing differences.
What transaction would result in a deferred tax asset or liability?
If a company depreciated an asset using a different method for financial reporting purposes and tax reporting purposes. For instance if the asset was depreciated using a straight line method for financial reporting and accelerated method for tax reporting
Why do we depreciate fixed assets?
Fixed assets are depreciated to try to match the cost of fixed assets with the benefits of using them.
What are intangible assets?
Assets that have no physical or tangible form such as R&D, patents and trade secrets, trademarks and goodwill.
What is goodwill?
Is an Intangible asset created when a company makes an acquisition. Goodwill reflects the excess purchase price over the fair market tangible book value of the acquired company´s asset.
How are the financial statements integrated!!!
Everything in the income statement affects the net income which affects retained earnings on the balance sheet and it is also the first line of the cash flow from the operations section of the cash flow statement. Every change on the balance sheet is a use or source of cash in the cash flow statement. Finally cash flow statement is like a bridge between the income statement and the balance sheet.
If the company incurs 10$ of pretax of depreciation expense how will this affect the three income statements.
On the income statement depreciation is an expense so operating income declines by 10$ with a tax rate of 40% then net income decline by 6$. On the cash flow statement the first line of the operations section net income decreased 6$ and depreciation increased 10$ so cash flow from operations increases 4$. On the balance sheet PP&E decreases 10$. Cash increases 4$ and earnings decrease by 6$. Balance sheet is balanced as assets decrease by 6%, then liabilities decrease by 6$ (PP&E and cash)
