Accounting Fundamentals

Question 1

What does the income statement show?

Answer 1

A company’s revenue, expenses and taxes over a period of time

Question 2

What criteria do income statement items need to meet?

Answer 2

Must correspond to given period, must impact the income available to common shareholders

Question 3

Whats the difference between common stock and preferred stock?

Answer 3

Both stocks are a form of ownership in a company, preferred stockholders have a higher claim to the company’s assets and dividends than common stockholders(Get paid first in liquidation instances)

Question 4

What’s the order of the income statement?

Answer 4

Revenue, COGS, OPEX, D&A, OP income, EBIT

Question 5

What does the balance sheet show?

Answer 5

A snapshot of a company’s resources; its assets, liabilities, and shareholder equity

Question 6

Why might a company’s assets not = its liability + equity

Answer 6

Either the company has resources that have not been accounted for, or has raised funding that is not marked towards assets

Question 7

What is an asset?

Answer 7

Something that results in future benefits for the company, such as an additional cash flow, additional ability to grow the business

Question 8

What is a liability or equity line item

Answer 8

Something that will result in a future obligations for the company such as a cash payment, the requirement to deliver a certain product or service

Question 9

What is common shares equity?

Answer 9

This is a funding source that either comes internally (via net income) or externally (stock issuance)

Question 10

What does the cash flow show?

Answer 10

Shows the full journey over cash within a company from cash flow from investing, cash flow from operating activities and cash from financing

Question 11

What does the cash flow from operating activity show?

Answer 11

Starts with Net income, adjusts for non-cash items and then factors in how operational balance sheet items change within the period

Question 12

What does the cash flow from the investing section show?

Answer 12

Anything related to the company’s investments, acquisitions and PP&E

Question 13

What does cash flow from financing show?

Answer 13

Items related to debt, dividends and issuing/repurchasing shares (corresponds to long term liabilities)

Question 14

What are 3 major line items for the income statement?

Answer 14

Revenue, cost of goods, SG&A

Question 15

What are 3 major line items for the Balance sheet statement?

Answer 15

Inventory, PP&E, Shareholders Equity

Question 16

How do all the statements link together?

Answer 16

The net income from the income statement affects retained earnings, a component of shareholders’ equity on the balance sheet. Net income is also the topline of the cashflow statement. Finally, the changes in cash from the cash flow statement are reflected in the cash line item on the balance sheet.

Question 17

How are changes to the balance sheet likely to manifest in the cashflow?

Answer 17

Via working capital (Operating activities)

Question 18

What is the at a glance purpose of the income statement?

Answer 18

Profitability ( via EBITDA)

Question 19

What is the at a glance purpose of the balance sheet statement?

Answer 19

Financial position

Question 20

What is the at a glance purpose of the cashflow statement?

Answer 20

Cash movements

Question 21

If you were stranded on a desert island,what statement would you pick to evaluate the overall health of a company?

Answer 21

Cashflow- it shows the true picture of how much cash a company generates, independent of non cash expenses

Question 22

Pick only 2 statements to assess a company’s prospects

Answer 22

Income and balance sheet, your’re able to create the cash flow for both

Question 23

What is working capital?

Answer 23

Worknig capital is the money the business needs to operate day to day

Question 24

Working capital formula?

Answer 24

Current assets - current liabilities

Question 25

How can you interpret working capital?

Answer 25

If the number is positive it means the comp can pay off its short term liabilities with its short term assets

Question 26

What is enterprise value?

Answer 26

It represents the value of a company that is attributable to all investors

Question 27

What is equity value?

Answer 27

Only represents the portion available to shareholders

Question 28

Why do we look at both?

Answer 28

Equity value is the number the public at large sees white enterprise value is the true value

Question 29

When looking at an acquisition of a company, do you look at enterprise or equity value

Answer 29

Enterprise value because thats how nuch an acquire really oays and includes debt repayments

Question 30

Enterprise value formula

Answer 30

Equity value +debt +preferred stock+minority interest - cash

Question 31

What is the impact of depreciation going up by $10 on the income statement?

Answer 31

No change to revenue, expenses may go up due to the increase in depreciation expense. No direct hit to EBITDA, but there is a decrease in Operating income (EBIT) due to an additional $10 of depreciation being deducted from EBITDA. Tax is calculated using Operating income so the amount paid in tax is reduced. Net income declines

Question 32

What is the impact of depreciation going up by $10 on the cashflow statement?

Answer 32

Net income is lower, depreciation is a non-cash expense, so it is added back to net income in the operating activities section

Question 33

Why is depreciation added back to the cash flow?

Answer 33

Net income includes all expenses, both cash and non-cash, therefore adding back depreciation ensures that the cash flow from operating activities reflects the true cash-generating capacity of the company.

Question 34

What is the impact of depreciation going up by $10 on the balance sheet?

Answer 34

$10 increase in accumulated depreciation, and a $10 decrease in net PP&E