IB interview Q&A Technical Flashcards
Walk me through the three financial statements
3 major financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement.
Income statement: gives the company’s revenues and expenses, and goes down to Net Income
Balance Sheet: shows the company’s Assets (resources such as cash, inventory, and PP&E) as well as its Liabilities such as Debt and Accounts Payables, and Shareholder’s Equity. Assets = L + SE
Cash Flow Statement: Shows the movement of cash in the company. Begins with NI, adjusts for non-cash expenses and working capital changes, and then lists cash flow from investing and financing activities. At the end you see the company’s net change in cash.
Can you give examples of major line items on each of the financial statements?
Income Statement: Revenue, COGS, SG&A, operating income, Pretax Income, Net Income
Balance Sheet: Cash, accounts receivable, Inventory, PP&E (plants property & equipment), Accounts Payable, Accrued expenses, debt, SE
Cash Flow: Net income, Depreciation & Amortization, Stock-Based compensation, Changes in Operating Assets & Liabilities, Cash flow from operations, capital expenditures, cash flow from investing, sale/purchase of securities, dividends issued, cash flow from financing.
How are the three financial statements connected?
Net income from the income statement flows into Shareholder’s Equity on the Balance Sheet, and into the top line of the Cash Flow statement.
If Depreciation is a non cash expense, why does it affect the cash balance? Where does depreciation show up on the Income Statement?
Although depreciation is a non-cash expense, it is tax deductible. Depreciation affects cash by reducing the amount of taxes you pay.
Depreciation could be in a separate line item or it could be embedded in COGS or Operating Expenses (different for every company). However, depreciation always reduces Pre-Tax Income.
What happens when Inventory goes up by $X, assuming you pay for it in cash?
No changes to income statement.
Cash Flow statement: Inventory is an asset, so decreases cash flow by $X, as does the Net Change in Cash at the bottom.
Balance Sheet: Inventory is up by $X, but cash is down by $X, so the changes cancel out and Assets = L + SE
Why is the income statement not affected by changes in inventory?
In the case of inventory, the expense is only recorded when the goods associated with it are sold - so if it’s just sitting in a warehouse, it does not count as a Cost of Good Sold or Operating Expense until the company manufactures it into a product and sells it.
What is Working Capital? How is it used?
Working Capital = Current Assets - Current Liabilities
If it’s positive, it means that a company can pay off its short term liabilities with its short term assets. Bankers look at Operating Working Capital more commonly, which is (Current Assets - Cash & Cash Equivalents) - (Current Liabilities - Debt).
What does negative Working Capital mean? Is that a bad sign?
No, not necessarily. Depends on the type of company and the specific situation.
1) Some companies with subscriptions or longer-term contracts often have negative Working Capital because of high Deferred Revenue balances.
2) Retail and restaurant companies like Amazon, Wal-Mart, and McDonald’s often have negative Working Capital because customers pay upfront - so they can use the cash generated to pay off their Accounts Payable rather than keeping a large cash balance on hand.
3) In other cases, negative Working Capital could point to financial trouble or possible bankruptcy
If cash collected is not recorded as revenue, what happens to it?
Usually it goes into the Deferred Revenue balance on the Balance Sheet under Liabilities. Over time, as the services are performed, the Deferred Revenue balance “turns into” real revenue on the Income statement.
What’s the difference between cash based and accrual accounting?
Cash-based accounting: recognizes revenue and expenses when cash is actually received or paid out
Accrual Accounting: recognizes revenue when collection is reasonably certain (i.e. after a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in cash.
how do you decide when to capitalize rather than expense a purchase?
If the asset has a useful life of over 1 year, it is capitalized (put on the Balance Sheet rather than shown as an expense on the Income Statement.)
A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?
Several possibilities:
1) the company is spending too much on Capital expenditures
2) the company has high interest expense and is no longer able to afford its debt
3) The company’s debt all matures on one date and it is unable to refinance it due to a “credit crunch” - and it runs out of cash completely when paying back the debt.
4) It has significant one-time charges (from litigation, for example) and those are high enough to bankrupt the company.
Why would Goodwill be impaired and what does Goodwill Impairment mean?
Usually this happens when a company has been acquired and the acquirer re-asses its intangible assets (such as customers, brand, and intellectual property) and finds that they are worth significantly less than they originally thought.
It often happens in acquisitions where the buyer “overpaid” for the seller and can result in a large net loss on the Income statement.
It can also happen when a company discontinues part of its operations and must impair the associated goodwill.
Describe Common Stock
the par value of however much stock the company has issued
Retained Earnings
How much of the company’s Net Income it has “saved up” over time.
Additional Paid in Capital
Keeps track of how much stock-based compensation has been issued and how much new stock employees exercising options have created. Also includes how much over par value a company raises in an IPO or other equity offering.
