ib questions Flashcards
What is the primary purpose of GAAP
The primary focus of GAAP is to ensure that the standardization of all financials are presented on a fair and consistent basis protecting the interests of investors and lenders. This is done in the U.S. bc the SEC (Securities and Exchange Commission) authorizes the FASB (Financial Accounting Standards Board) to determine the accounting rules followed by the publicly traded companies.
Briefly walk me through the 3 financial statements
The three financial statements are the income statement, balance sheet, and cash flows statement
The i/s shows a company’s profitability over a specified period of time (typically quarterly or annually) the beginning line starts with revenue and upon deducting costs and variable expenses the end with the net income
The b/s shows a snapshot of a company’s resources “assets” and sources of funding “liabilities and shareholders equity” at a specific point in time (typically the end of each quarter or fiscal year)
The CFS is an indirect approach of showing the cash inflows/outflows during a period the starting line is net income and is adjusted for non-cash expenses like D&A and changes in working capital… this flows into the cash from operations then cash from investing activities, and finally cash from financing activities together these three represent the cash inflows/outflows “aka the net change in cash” for a company during a specific period
So the three main financial statements are the i/s (which shows company profitability), b/s (showing a snapshot of company resources and funding), and the CFS (showing the cash inflows/outflows for a specific period)
Walk me through a CFS
The two types of cash flow statements are direct and indirect. The indirect method is the one that is most frequently used, and it divides the cash flow statement into three parts: cash from operations, cash from investing activities, and cash from financing activities. The sum of these represents the net change in cash throughout the course of the period. In order to arrive at cash flow from operations, cash from operations starts with net income and adds back non-cash items like depreciation and amortization as well as reconciles changes in working capital. Capital expenses and other investing operations, such as the purchase of intangible assets or financial investments, are included in cash from investing activities. The final category, cash from financing operations, includes cash flows from dividends, debt repayment, and share repurchases as well as inflows from borrowing and stock issuances.
Walk me through an income statement
Starting with the period’s revenue, the income statement subtracts operating costs such cost of goods sold and SG&A to get operating income. Pre-tax income is then calculated by subtracting non-operating costs like interest expenditure and adding any non-operating revenue. To get to net income, which is the bottom line, tax expense is then subtracted. Earnings per share for the generally given period can be found below the income statement.
Walk me through the balance sheet
The balance sheet displays the assets, liabilities, and equity divisions of a business at a particular point in time. The organization of assets is based on their level of liquidity, with “current assets” designating assets that are convertedinto cash within a year. This iscomprised ofcash as well as accountsreceivables and inventories. Property, plant, and equipment, intangible assets, and goodwill are examples of common long-term assets.
Liabilities are also organized in order of when they are due – current liabilities include accounts payable and short-term debt, while long-term liabilities include long-term debt. Lastly, the equity section shows a company’s common stock, treasury stock and retained earnings. Assets represent what a company owns and must always equal liabilities and equity – which represent the way assets were funded.
How are the 3 financial statements connected to each other
The income statement is directly connected to the balance sheet through retained earnings. Specifically, retained earnings increase (are credited) each period by net income less dividends. The offsetting balance sheet adjustments impact a variety of line items on the balance sheet, including working capital and fixed assets. The cash flow statement is connected to the income statement through net income as well, which is the starting line of the cash flow statement, while the cash impact of various balance sheet line items including working capital, fixed assets, liabilities and equity are all reflected in the 3 sections of the cash flow statement to arrive at the net change in cash, which is added to the beginning- period balance sheet to arrive at the ending-period balance sheet.
