The Income Statement and Balance Sheet

Question 1

Professionally managed investment capital that typically buys entire firms at a time

Answer 1

Private Equity

Question 2

One of the three main financial statements that covers a period of time. Starts with sales, takes out expenses, and ends with net income

Answer 2

Income Statements

Question 3

One of the three financial statements. It is a snapshot of the firm’s assets, liabilities, and equity at any point in time

Answer 3

Balance Sheet

Question 4

Non-cash accounting accounts representing money either owed or due, typically in the short term

Answer 4

Accruals

Question 5

A current liability that represents any money the firm owes suppliers and other firms

Answer 5

Accounts Payable

Question 6

Typically the firm does not pay this on accounts payable

Answer 6

Interest

Question 7

One of the three financial statements that includes cash flow from operations, investing, and financing

Answer 7

Statement of Cash Flows

Question 8

The income statement shows the

Answer 8

Results of operations over time

Question 9

Think of the income statement as a ___________ for a period

Answer 9

Video Camera Tracking Performance

Question 10

The balance sheet offers a snapshot of the

Answer 10

Firm’s assets and financing at a particular point in time

Question 11

The Statement of Cash Flows tracks all ______ in and out of the firm

Answer 11

Cash

Question 12

The business function responsible for creating the historical financial statements

Answer 12

Accounting

Question 13

Backward looking and risk free

Answer 13

Accounting

Question 14

Forward looking and involves massive uncertainty

Answer 14

Finance

Question 15

Analyzing the past is merely a

Answer 15

springboard to understanding the future

Question 16

Accounting system based on recording accounts based on historical prices and the matching principle

Answer 16

Accrual Accounting

Question 17

Accrual accounting principle to match revenues and expenses in the same period

Answer 17

Matching Principle

Question 18

Accrual Accounting and this are used interchangeably

Answer 18

Generally Accepted Accounting Principles (GAAP)

Question 19

Typically last line of the income statement

Answer 19

Net Income aka Earnings

Question 20

An informal metric based on cash in and out of the firm

Answer 20

Cash-based income

Question 21

Based on the government’s definition of income, this is the amount of income the government will tax

Answer 21

Income for Tax Purposes

Question 22

The income is calculated using accrual accounting (GAAP).

Answer 22

Accounting Income

Question 23

The best metric for understanding the operations of the firm

Answer 23

Accounting Income

Question 24

The most complicated metric for firm operations

Answer 24

Accounting Income

Question 25

Revenue-expenses =

Answer 25

Net Income

Question 26

The use of accrual accounting means that every line item on the income statement requires

Answer 26

Management to make judgements about what is reported

Question 27

Accrual Accounting permits firms to time the recognition of sales based on certain rules

Answer 27

Revenue Recognition

Question 28

Represents the directs costs (directs materials and direct labor) associated with production and suffers from the same recognition predicament as revenue

Answer 28

Cost of Goods Sold

Question 29

Subtracting Cost of Goods Sold from revenue gives the company's

Answer 29

Gross Profit

Question 30

Typically the third line of the income statement which equals sales-COGS

Answer 30

Gross Profit

Question 31

The expenses on an income statement that fit between gross profit and EBIT

Answer 31

Operating Expenses

Question 32

Operating Expenses often include

Answer 32

Office expense Administrative expense Depreciation expense Research and Development expense

Question 33

A non-cash expense used to approximate the decrease in value of an asset

Answer 33

Depreciation

Question 34

EBIT stands for

Answer 34

Earnings Before Interest and Taxes

Question 35

Subtracting operating expenses from gross profit yields

Answer 35

EBIT (Operating Profit)

Question 36

Amount owed to creditors that appears on the income statement between EBIT and earnings before taxes

Answer 36

Interest Expense

Question 37

Typically the second to the last line of the income statement right before net income, and represents income taxes paid by the firm

Answer 37

Tax Expense

Question 38

Subtracting both interest and taxes from EBIT leaves us with

Answer 38

Net Income

Question 39

Assets=

Answer 39

Liabilities + Owners Equity

Question 40

Equity=

Answer 40

Assets-Liabilities

Question 41

The sum of all equity accounts, most commonly common stock, APIC, and retained earnings

Answer 41

Owner's Equity (OE)

Question 42

All assets must be

Answer 42

financed

Question 43

Accrual accounting principle to recorded assets, liabilities, and equity at historical levels

Answer 43

Historical Cost Principle

Question 44

The total amount of depreciation claimed against the fixed assets of the firm

Answer 44

Accumulated Deprecitation

Question 45

Assets that are expected to be liquidated within a year

Answer 45

Current Assets

Question 46

Current assets are listed in the order of

Answer 46

Liquidity

Question 47

Very liquid current asset on the balance sheet such as money markets, t-bills, etc.

Answer 47

Marketable Securities

Question 48

A type of current asset which represents any money owed to the firm for services rendered

Answer 48

Accounts Receivable

Question 49

A current asset that is typically viewed as the least-liquid current asset

Answer 49

Inventories

Question 50

This includes raw materials, work-in-process, and finished goods

Answer 50

Inventories

Question 51

Assets on the balance sheet with a lifespan greater than a year

Answer 51

Fixed Assets

Question 52

PP&E

Answer 52

Property, Plant, & Equipment

Question 53

The original cost of all non-current assets held for use by the firm

Answer 53

Gross PP&E

Question 54

Gross PP&E is offset by

Answer 54

Accumulated Depreciation

Question 55

An income statement item whereby the firm claims the expense of using up fixed assets

Answer 55

Depreciation Expense

Question 56

The accounting value recorded on the balance sheet

Answer 56

Book Value

Question 57

Liabilities on the balance sheet with a short life span (typically less than a year)

Answer 57

Current Liabilities

Question 58

A current liability that represents money borrowed for the short term, typically under 5 years

Answer 58

Notes Payable

Question 59

Money owed to suppliers as a result of purchases made on credit

Answer 59

Accounts Payable

Question 60

Involves an explicit interest-bearing arrangement with the lender

Answer 60

Notes Payable

Question 61

Represent expenses incurred but not yet paid

Answer 61

Accruals

Question 62

Wages that the company owes to employees, but has not paid yet

Answer 62

Accrued Wages

Question 63

Include debt obligations with maturity longer than one year

Answer 63

Long Term Liabilities

Question 64

A type of equity on the balance sheet which represents equity sold to common share holders at par value

Answer 64

Common Stock

Question 65

These are the last in line to receive their money back in the event of bankruptcy

Answer 65

Common Stockholders

Question 66

An equity item on the balance sheet representing the proceeds minus the par value of stock

Answer 66

Additional Paid in Capital

Question 67

Price at which stock is initially sold

Answer 67

Process

Question 68

Par value of stock is usually

Answer 68

$1 per share

Question 69

Money plowed back into the company from prior earnings

Answer 69

Retained Earnings

Question 70

There are only 2 things a company can do with net income:

Answer 70

Pay it out as dividends to shareholders Retain it within the firm

Question 71

Net Income =

Answer 71

Dividends + Change in RE

Question 72

New RE =

Answer 72

Old RE + Change in RE

Question 73

New RE =

Answer 73

Old RE + Net Income - Dividends