Accounting

Question 1

What does an Income Statement show?

Answer 1

The Income Statement lists a company’s revenue, expenses, and taxes, with its
after-tax profit at the very bottom, over a period of time (one quarter, one month,
or one year).

Question 2

What are the qualifications an item must meet to appear on the income statement?

Answer 2

1. It must correspond to the period shown on the Income Statement only –
   if you’re paying for an asset that will last for 10-20 years, it would not
   appear on a 1-year Income Statement.
2. It must affect the company’s taxes. For example, interest paid on debt is
   tax-deductible so it appears on the Income Statement… but repaying debt
   principal is not tax-deductible, so it does not appear on the Income
   Statement.

Question 3

What are the 4 main sections of an income statement?

Answer 3

1. Revenue and Cost of Goods Sold
   (COGS)
2. Operating Expenses
3. Other Income and Expenses
4. Taxes and Net Income

Question 4

What is Revenue and Cost of Goods Sold
(COGS)

Answer 4

Revenue is the value of the
products/services that a company
sells in the period (Year 1 or Year 2)

COGS represents the expenses
that are linked directly to the sale of
those products/services.

Question 5

What are Operating Expenses?

Answer 5

Expenses: Items that are
not directly linked to product sales

– employee salaries, rent, marketing,
research and development, as well
as non-cash expenses like Depreciation and Amortization.

Question 6

What are Other Income and Expenses?

Answer 6

This goes between Operating Income and
Pre-Tax Income.
Interest shows up here, as well as items such as Gains and Losses when Assets are sold, Impairment Charges, Write-Downs, and
anything else that is not part of the company’s core business operations.

Question 7

What are Taxes and Net Income?

Answer 7

Net Income represents the company’s “bottom
line” – how much in after-tax profits it has earned.

Net Income = Revenue– Expenses – Taxes.

Question 8

T/F: Income Statement revenue, expenses, and taxes do NOT need to be related to a company’s daily operational activities

Answer 8

T-Gains and Losses on asset sales, Depreciation, and Interest Expense still
appear on the IS but are not related to everyday business.

Question 9

T/F: Income Statement revenue, expenses, and taxes do not need to be cash expenses (or cash revenue)

Answer 9

T: Depreciation and Amortization are both non-cash expenses. Also,
companies often record revenue and expenses here before they receive or
pay them in cash.

Question 9

T/F: In regards to on Income Statement revenue, expenses, and taxes, sometimes, items may be embedded in other items

Answer 9

T: sometimes Depreciation is included in COGS or Operating Expenses;
other times it is a separate item.

Question 9

Which of the following appears on the Income Statement?

Revenue,
COGS,
Operating Expenses, Depreciation,
Amortization,
Stock-Based Compensation, Interest, Gains / (Losses),
Write-Downs,
Other Income / (Expenses)

Answer 9

All of the above!

Question 9

T/F: Income Statement always contains the following:
Capital Expenditures, Purchasing or Selling Investments
and PP&E (Plants, Property & Equipment), Dividends, Issuing or
Repaying Debt Principal,
Issuing or Repurchasing Shares, Changes to
Balance Sheet Items such as Cash,
Debt,
Accounts Receivable, Accounts
Payable, and so on.

Answer 9

F: None of these ever appear on the Income Statement

Question 9

What do all the items that appear on the Income Statement have in common?

Answer 9

1. They do affect the company’s taxes (e.g. paying an employee’s salary
   reduces the company’s taxable income); and
2. They correspond to the period shown on the Income Statement (e.g.
   revenue in Year 1 refers to all sales to customers in Year 1… not Year 2).

Question 10

What do all the items that do not appear on the Income Statement have in common?

Answer 10

1. They do not affect the company’s taxes (e.g. Dividends or Purchasing
   Inventory)
2. They do not correspond to the period listed on the Income
   Statement (e.g. Capital Expenditures refers to purchasing Assets that often
   last for 10-20 or more years).

Question 10

What does the Balance Sheet show?

Answer 10

The Balance Sheet shows the company’s resources –
its Assets – and how it acquired those resources – its
Liabilities & Equity – at a specific point in time.

Question 10

Talk to me about Assets

Answer 10

Assets can all be sold for cash, and they may even increase in value over time, which would result in more money for you.

Question 11

What are the key rules of a Balance Sheet?

Answer 11

1. Assets must always equal
   Liabilities + Equity – no
   exceptions.

(Total Long-Term Assets = Total Long-term Liabilities + Total Shareholders’ Equity)

2. An Asset is an item that will
   result in, directly or indirectly,
   additional cash in the future.
3. A Liability is an item that will
   result in, directly or indirectly,
   less cash in the future. (Most
   Liabilities are related to external
   parties – payments owed to
   suppliers, or borrowed money,
   for example. Liabilities are used
   to fund a business.)
4. Equity line items are similar to
   Liabilities (used to fund a business), but they refer to the
   company’s own internal operations rather than external
   parties.

Question 12

What is the difference between a Current Asset and a Long-Term Asset?

Answer 12

A current asset is anything that lasts for under a year

A Long-Term asset is anything that lasts for more than 1 year

Question 13

What are the Key Assets?

Answer 13

Cash
Short-term Investments
Accounts Receivable
Prepaid Expense
Inventory
PP&E
Other Intangible Assets
Long-Term Investments
Goodwill

Question 14

Cash

Answer 14

Cash in your bank account

Question 15

Short term investments

Answer 15

Less liquid than cash – Certificates of Deposit
(CDs) and money-market accounts and such.

Question 16

Accounts Receivable

Answer 16

The company has recorded this as revenue on its
Income Statement but hasn’t received it in cash yet. It’s like an “IOU” (signed document acknowledging a debt) from
a customer. And it will turn into cash when the customer pays.

Question 17

Prepaid Expense

Answer 17

The company has paid these expenses in cash but hasn’t
recorded them as expenses on the Income Statement yet.

Question 18

Inventory

Answer 18

What they need to manufacture and sell products – for a company like Apple, all the parts that go into iPhones and iPads.

Question 19

PP&E (Property, Plant, and Equipment)

Answer 19

Factories, buildings, land, equipment, and anything else that will
last for over a year and contribute to the company’s core business.

Question 20

Other Intangible Assets

Answer 20

Patents, trademarks, intellectual property…
usually the result of acquisitions. Similar to Goodwill, but this balance
amortizes (decreases) over time as these items “expire.”

Question 21

Long-Term Investments

Answer 21

Less liquid and longer-lasting investments than Cash or Short-Term Investments.

Question 22

Goodwill

Answer 22

The premium that the company has paid over other companies’
Shareholders’ Equity when acquiring them

Question 23

What are the key Liabilities on a Balance Sheet?

Answer 23

Revolver
Accounts Payable
Accrued Expenses
Deferred Revenue
Deferred Tax Liability
Long-Term Debt

Question 24

Revolver

Answer 24

Similar to a “credit card” for a company; it
borrows money as needed and must repay it quickly.

Question 25

Accounts Payable

Answer 25

The company has recorded these
as expenses on the Income Statement, but hasn’t yet
paid them out in cash yet – used for one-time items
with specific invoices, such as payment for legal services.

Question 26

Accrued Expenses

Answer 26

The company has recorded these as expenses on the
Income Statement, but hasn’t yet paid them out in cash yet – used for
recurring monthly items without invoices, such as employee wages,
utilities, and rent.

Question 27

Deferred Revenue

Answer 27

The company has collected cash in advance from
customers for products/services yet to be delivered, and it will recognize
this as real revenue over time.

Question 28

Deferred Tax Liability

Answer 28

The company has paid lower taxes than what it
really owes, and needs to make

Question 29

Long-Term Debt

Answer 29

Similar to a mortgage or a car loan: debt that is due and
must be repaid in over a year’s time.

Question 30

What are the Equity Items on a Balance Sheet?

Answer 30

Common Stock & Additional Paid-In Capital (APIC)
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (AOCI)

Question 31

Common Stock & Additional Paid-In Capital (APIC)

Answer 31

This represents the market value of shares at the time
those shares were issued by the company. When a company goes public, the total dollar value of shares issued shows up here. This does not change even if the share price changes afterward.

Question 32

Treasury Stock

Answer 32

This represents the cumulative value of shares the
company has repurchased from investors. This does not change even if the share price changes afterward.

Question 33

Retained Earnings

Answer 33

This represents the company’s saved up, after-tax
profits (minus any dividends it has issued). This is like the $200K you
saved up, after-taxes, in our “personal Balance Sheet” example above.

Question 34

Accumulated Other Comprehensive Income (AOCI)

Answer 34

This is a section for
“miscellaneous saved-up income” – you see items like the effect of foreign
currency exchange rate changes here, as well as unrealized gains and
losses on certain types of securities (i.e. if their values go up or down but
the company has not yet sold them).

Question 35

What does the Cash Flow do?

Answer 35

Similar to the Income Statement, the Cash Flow Statement tracks changes over a period of time (one month, one quarter, or one year).

Question 36

Why does the Cash Flow Statement exist?

Answer 36

1. You may have shown non-cash revenue or expenses on the Income
   Statement. These need to be adjusted on the Cash Flow Statement to
   determine how your cash balance actually changes.
2. There may be additional cash inflows and outflows that have not
   appeared on the Income Statement. For example, Capital Expenditures
   and Dividends are both real cash expenses. You need to factor these in to
   figure out how your cash balance really changes by.

Question 37

What are the main sections of a Cash Flow Statement?

Answer 37

Cash Flow from Operations (CFO)
Cash Flow from Investing (CFI)
Cash Flow from Financing (CFF)

Question 38

What is Cash Flow from Operations (CFO)?

Answer 38

– Net Income from the Income
Statement flows in at the top.
-Then, you adjust for non-cash expenses, and take into account how
operational Balance Sheet items such
as Accounts Receivable and
Accounts Payable have changed.

Question 39

What is Cash Flow from Investing (CFI)?

Answer 39

Anything related to the company’s
investments, acquisitions, and
PP&E shows up here. Purchases are
negative because they use up cash,
and sales are positive because they
result in MORE cash.

Question 40

What is Cash Flow from Financing (CFF)?

Answer 40

Items related to debt, dividends,
and issuing or repurchasing shares
show up here.

Question 41

Is this true? CFO is for
Current Assets and Current Liabilities, CFI is for Long-Term Assets, and CFF is
for Long-Term Liabilities and Equity.

Answer 41

Not always, here are a few exceptions:

• Deferred Revenue is often a Long-Term Liability, but never shows up in
  Cash Flow from Financing – because it’s related to customers paying the
  company for products/services.
• Short-Term Investments is a Current Asset, but it appears in Cash Flow
  from Investing, not Cash Flow from Operations – since it’s an investment
  and has nothing to do with accepting customer payments or paying for
  employees or other expenses.
• The Revolver is a Current Liability, but it appears in Cash Flow from
  Financing, not Cash Flow from Operations – because it’s related to how
  the company is financing its operations, not its actual operations.

Question 42

If an item was already recorded on the Income Statement and it is a true cash
revenue or expense, it will not appear on the Cash Flow Statement unless…..

Answer 42

you use the Cash Flow Statement to “re-classify” income or expenses.

The most common example is Gains or Losses on Asset Sales – those are most
certainly cash income or expenses … you list them in Cash Flow from
Operations because you’re re-classifying that cash flow

– you’re subtracting it out of Cash
Flow from Operations and instead including it as part of the full selling price of the assets in Cash Flow from Investing instead.

Question 43

How do you link the 3 statements?

Answer 43

1. First, Net Income from the bottom of the Income Statement becomes the top line of the Cash Flow Statement.
2. Second, you add back non-cash expenses from the Income Statement (and flip the signs of items such as Gains and Losses).
3. Third, you reflect changes in operational Balance Sheet line items – if an Asset goes up, cash flow goes down and vice versa; if a Liability goes up,
   cash flow goes up and vice versa.
4. Fourth, you reflect Purchases and Sales of Investments and PP&E in Cash
   Flow from Investing.
5. Fifth, you reflect Dividends, Debt issued or repurchased, and Shares
   issued or repurchased in Cash Flow from Financing.
6. Sixth, you calculate the net change in cash at the bottom of the CFS, and
   then link this into cash at the top of the next period’s Balance Sheet.
7. Seventh, you update the Balance Sheet to reflect changes in Cash, Debt,
   Equity, Investments, PP&E, and anything else that came from the Cash
   Flow Statement.