Key Rule 2

Question 1

Why do we add back depreciation in the cash flow statement?

Answer 1

No actual cash has changed hands so we have to add it back.

Question 2

Why does depreciation affect cash balance?

Answer 2

Depreciation is tax-deductible and decreases cash and taxes paid.

Question 3

Why do we have to look in the CFS for depreciation?

Answer 3

Depreciation is usually embedded in other Income Statement items such as COGS or Opex, CFS is the one which gives the full amount.

Question 4

What kind of expense is asset impairment?

Answer 4

A non-cash expense.

Question 5

When an asset breaks down, what 2 categories must you add back?

Answer 5

Asset impairment and depreciation

Question 6

When an asset breaks down at the end of the year, what do you do with the depreciation?

Answer 6

Gotta depreciate for that year.

Question 7

Does debt show up on the income statement when initially issued?

Answer 7

No.

Question 8

Why is the IS unaffected when the debt principal is being repaid?

Answer 8

Debt principal is a liability, not an expense or income.

Question 9

Is there debt interest in the cash flow statement?

Answer 9

No!!

Question 10

Does equity ever show up on the income statement?

Answer 10

No.

Question 11

What does issuing equity do to shares?

Answer 11

Dilutes shares.

Question 12

What does it mean if shares are diluted?

Answer 12

• less cash per shareholder
• receive less if company sold

Question 13

Why aren’t common stock dividends on the income statement?

Answer 13

They don’t reduce income to common stockholders.

Question 14

What is a stock repurchase?

Answer 14

When company repurchases its stock, usually at a premium price

Question 15

What happens in a stock repurchase?

Answer 15

Share count reduced, outflow of cash

Question 16

What is treasury stock?

Answer 16

previously outstanding stock that has been bought back from stockholders by the issuing company

Question 17

What is the effect of treasury stock on the number of shares in the market?

Answer 17

decreases

Question 18

What does the treasury stock line in the balance sheet do?

Answer 18

It is a contra equity account which minuses the equity section by the amount it holds.

Question 19

What is preferred stock?

Answer 19

Preferred stock refers to a class of ownership that has a higher claim on assets and earnings than common stock

Question 20

What is preferred stock’s effect on existing investor ownership?

Answer 20

No effect

Question 21

What is preferred stock’s effect to income available to common shareholders?

Answer 21

Decreases income available to commo shareholders b/c they get paid first (minus off IS to get net income in common).

Question 22

What is the tax treatment of preferred stock?

Answer 22

non tax deductible

Question 23

Why are preferred stock not used often?

Answer 23

• non tax deductible
• reduce income available to common stockholders

Question 24

When do companies use preferred stock?

Answer 24

when it can’t issue debt or equity

Question 25

What is the cost of preferred stock?

Answer 25

More expensive than debt, cheaper than common equity.

Question 26

What happens when treasury stocks are sold for profit?

Answer 26

profits go into paid-in capital account.

Question 27

An increase in the treasury stock is shown as

Answer 27

always negative

Question 28

The number in a treasury stock account is

Answer 28

Either 0 or -ve