General Financial Statements

Question 1

What appears on the CFS?

Answer 1

• stuff on IS and affected NI but non-cash which needs adjusting
• not on IS and affects cash

Question 2

What are typical one-time non-recurring items?

Answer 2

write-offs, gain/ loss on PPE sale

Question 3

When is the transaction recorded in cash accounting?

Answer 3

Recorded when payment is received in cash

Question 4

When is the transaction recorded in accrual accounting?

Answer 4

When the transaction occurs

Question 5

How is cash accounting accounted for?

Answer 5

cash up rev up

Question 6

How is accrual accounting accounted for?

Answer 6

accounts receivable up revenue up
accounts receivable down cash up

Question 7

How is accrual accounting different from cash accounting?

Question 8

How are assets different from liabilities & equities?

Answer 8

A: resources
L&E: obligations

Question 9

How are liabilities different from equities?

Answer 9

L: external parties
Eq: internal operations

Question 10

How are liabilities and equities similar?

Answer 10

Both are funding sources for assets

Question 11

What items appear on the income statement?

Answer 11

• product it corresponds to must have been delivered within period of IS
• affects business income available to common shareholders

Question 12

What do you do if the CFS starts with something other than NI?

Answer 12

• convert into CFS format of NI, adjustments, change in WC
• large companies provide reconciliations to do this
• if can’t adjust, use simpler method to project

Question 13

How is IFRS different from GAAP?

Answer 13

• cash flow statement doesn’t start with NI
• puts items in random locations on CFS-> rearrange

Question 14

What is the most important statement?

Answer 14

Cash flow statement

Question 15

Why is CFS most important statement?

Answer 15

shows how much cash is being generated
valuation is based on cash flow

Question 16

How can you construct a CFS from the other 2?

Answer 16

IS + BS (old, end)
maybe, but ambigious
eg. know PPE but not capex-dep split

Question 17

How can you construct the balance sheet from IS and CF?

Answer 17

Ambigious

Question 18

How can you construct the IS from the BS and CF?

Answer 18

Nope- not enough info.

Question 19

How is IS linked to BS?

Answer 19

• PPE (BS) -> leads to dep (IS)
• debt (BS) -> interest expense (IS)
• Net income (IS) -> dividend added to RE (BS)

Question 20

How is CF linked to IS?

Answer 20

• NI (IS) -> NI (CFO)

Question 21

How is BS linked to CF?

Answer 21

• PP&E (BS) -> dep/ capex is calculated from this (CF)
• line items under changes in net working capital eg. accounts payable are all from BS
• PPE sale proceeds (CFI) is from BS
• beginning cash is from BS
• end cash goes to BS

Question 22

Why 3 statements are needed?

Answer 22

• always a difference between NI and real cash flow
• 3 statements lets us estimate cash flow more accurately

Question 23

Walk me through IS

Answer 23

shows revenue, expense and tax over a period and ends with net income which is after-tax income

Question 24

Walk me through BS

Answer 24

shows the assets, liabilities and equity at a specific point of time
- it must balance: assets must equal to liabilities and equities
- assets- resources, liabilites- obligations, equity- funding from shareholders

Question 25

Walk me through CFS

Answer 25

Shows cash flow changes across operating, investing and financing activities. Under cash flow from operating activities, adjustments and changes to working capital are shown. Ends in cash.