Basics

Question 1

Gross Profit is

Answer 1

Sales - Cost of Goods Sold

Question 2

Four basic Fin Statements (GAAP)

Answer 2

1. Income Statement
2. Balance Sheet
3. Statement of Changes in Equity Position
4. Statement of Cash Flow

Question 3

What is the purpose of each part of the Statement of Cash Flows

Answer 3

Operating activities relate to the firm’s day-to-day business as reported in the income statement and include an analysis of current assets and current liabilities as they relate to the income statement.

Investing activities include the cash flows from buying and selling long-term assets and the debt or equity securities (investments) of other entities

Financing activities relate to how the organization funds the assets used in operations. This includes an analysis of long-term liabilities and stockholders’ equity.

Question 4

What is the indirect method for preparing Statement of Cash Flows

Answer 4

Adjusts net income to net cash flow by

1. adjusting net income for non-cash expenses
   - ie depreciation
2. adjusting for changes to current assets and current liabilities
   - ie beg bal - ending bal
3. adjusting for gains and losses from the sale of assets
   * refers only to preparing op section* investing and fin sections are prepped using direct method***

Question 5

When preparing cash flow using indirect method, the change in current liabilities

Answer 5

increase in liabilities represents a source of cash
- items were purchased on credit
- added to net income
decrease in liabilities is an outflow of cash
- creditors were paid in cash
- subtracted from net income

Question 6

When preparing cash flow using indirect method, the change in current assets

Answer 6

increase in current assets represents an outflow of cash
- items were paid for with cash (prepaid) OR cash has not yet been received (A/R)
- subtracted from net income
decrease in current assets represents a source of cash
- cash was received (A/R)
- added to net income

Question 7

The investing section of the Statement of Cash Flows covers

Answer 7

cash flows from buying and selling long-term assets and the debt or equity securities (investments) of other entities.

The following are examples of investing activities:

• Property, plant, and equipment
• Debt investments
• Equity securities in other entities in the form of common or preferred stock

Question 8

The financing section of the Statement of Cash Flows covers

Answer 8

how the organization funds the assets used in operations.

These activities are taken from the long-term liability and stockholders’ equity sections of the balance sheet. Examples are:

• Issuing long-term debt
• Retiring (paying back) long-term debt
• Issuing common stock and preferred stock
• Paying dividends

Question 9

Where are interest payments recorded on Statement of Cash Flows

Answer 9

interest payments are reported as interest expense on the income statement and are included in net income in the operating activities section.

Question 10

How does gross margin differ from gross profit?

Answer 10

Gross margin = (revenue - COGS)/ revenue
It is the %; while gross profit is the $
However, often used interchangeably - watch problem.