Financial Edge - Accounting

Question 1

Main financial statements?

Answer 1

Income statement
Balance sheet
Cash flow statement

Question 2

What are the two main ways a company can use operating cash flow?

Answer 2

Financing or investing activities.

I.e., company could return to cash to shareholders, though dividends or share repurchases, or a company could invest in further operating assets in the hope of generating greater profits

Question 3

What is the difference of timeframe between income statement and cash flow statement, and the balance sheet?

Answer 3

Balance sheet is a snapshot at a point of time, where as income and cash flow statements show what happens over a period

Question 4

How do income statements and cash flow statements link balance sheets?

Answer 4

2 balance sheets show snapshots at the end of periods. The income statement and cash flow statement can link these two balance sheets together.

Question 5

What is a good way of ascertaining whether a footnote relates to the balance sheet or the cash flow/income statement?

Answer 5

Look at whether refers to a specific date or period ending; specific date will likely be a snapshot hence balance sheet, whereas period ending likely income or cash flow statement

Question 6

How do assets relate to liabilities and equity? How can they be grouped?

Answer 6

Assets = Liabilities + Equity

Liabilities + Equity are the sources of funding, whilst assets is what you have spent the funding on

Question 7

What happens to balance sheet when you issue shares for cash?

Answer 7

Equity goes up, so does assets through cash

Question 8

What happens to balance sheet when you take out a loan for cash?

Answer 8

Liabilities go up, so does assets through cash

Question 9

What happens to balance sheet when you purchase car for cash?

Answer 9

Long-term assets go up through PPE purchase, cash goes down

Question 10

How does net income relate to equity section on balance sheet?

Answer 10

Net income lows into retained earnings in the equity section

Question 11

What happens to balance sheet when you pay worker with cash?

Answer 11

Cash goes down so assets go down, equity goes down because net income is reduced so retained earnings is lower

Question 12

What happens to balance sheet when you expense a bill but it has not yet been paid?

Answer 12

Bill will have been expensed, so net income is down and therefore so is retained earnings. In return, accounts payable goes up, so L + E remains unchanged