Breaking Into Wall Street Basic Questions with || || || || || || ||
accurate detailed answers || ||
Walk me through the 3 financial statements - ✔✔The 3 major financial statements are the Income
|| || || || || || || || || || || || || || || ||
Statement, Balance Sheet and Cash Flow Statement. The Income Statement gives the company's || || || || || || || || || || || || ||
revenue and expenses, and goes down to Net Income, the final line on the statement. The Balance
|| || || || || || || || || || || || || || || || ||
Sheet shows the company's Assets - its resources - such as Cash, Inventory and PP&E, as well as
|| || || || || || || || || || || || || || || || || ||
its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity. Assets must equal
|| || || || || || || || || || || || || || || ||
Liabilities plus Shareholders' Equity. The Cash Flow Statement begins with Net Income, 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; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); || || || || || || || || || || || ||
Operating Income; Pretax Income; Net Income. http://breakingintowallstreet.com || || || || || || ||
http://www.mergersandinquisitions.com 7 Balance Sheet: Cash; Accounts Receivable; Inventory; || || || || || || || ||
Plants, Property & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt;
|| || || || || || || || || ||
Shareholders' Equity. Cash Flow Statement: Net Income; Depreciation & Amortization; Stock- || || || || || || || || || ||
Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations;
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Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends Issued;
|| || || || || || || || || || ||
Cash Flow From Financing. || || ||
How do the 3 statements link together? - ✔✔To tie the statements together, Net Income from the
|| || || || || || || || || || || || || || || || ||
Income Statement flows into Shareholders' Equity on the Balance Sheet, and into the top line of
|| || || || || || || || || || || || || || || ||
the Cash Flow Statement. Changes to Balance Sheet items appear as working capital changes on
|| || || || || || || || || || || || || || ||
the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such
|| || || || || || || || || || || || || ||
as PP&E, Debt and Shareholders' Equity. The Cash and Shareholders' Equity items on the
|| || || || || || || || || || || || || ||
Balance Sheet act as "plugs," with Cash flowing in from the final line on the Cash Flow
|| || || || || || || || || || || || || || || || ||
Statement.
If I were stranded on a desert island, only had 1 statement and I wanted to review the overall
|| || || || || || || || || || || || || || || || || || ||
health of a company - which statement would I use and why? - ✔✔You would use the Cash Flow
|| || || || || || || || || || || || || || || || || || ||
Statement because it gives a true picture of how much cash the company is actually generating,
|| || || || || || || || || || || || || || || ||
independent of all the non-cash expenses you might have. And that's the #1 thing you care about || || || || || || || || || || || || || || || || ||
when analyzing the overall financial health of any business - its cash flow.
|| || || || || || || || || || || ||
, Let's say I could only look at 2 statements to assess a company's prospects - which 2 would I use
|| || || || || || || || || || || || || || || || || || || ||
and why? - ✔✔You would pick the Income Statement and Balance Sheet, because you can create
|| || || || || || || || || || || || || || || ||
the Cash Flow Statement from both of those (assuming, of course that you have "before" and
|| || || || || || || || || || || || || || || ||
"after" versions of the Balance Sheet that correspond to the same period the Income Statement is
|| || || || || || || || || || || || || || || ||
tracking).
. Walk me through how Depreciation going up by $10 would affect the statements. - ✔✔Income
|| || || || || || || || || || || || || || || ||
Statement: Operating Income would decline by $10 and assuming a 40% tax rate, Net Income || || || || || || || || || || || || || || ||
would go down by $6. Cash Flow Statement: The Net Income at the top goes down by $6, but the
|| || || || || || || || || || || || || || || || || || || ||
$10 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from
|| || || || || || || || || || || || || || ||
Operations goes up by $4. There are no changes elsewhere, so the overall Net Change in Cash || || || || || || || || || || || || || || || || ||
goes up by $4. Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets side
|| || || || || || || || || || || || || || || || ||
because of the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement.
|| || || || || || || || || || || || || || || || || || ||
Overall, Assets is down by $6. Since Net Income fell by $6 as well, Shareholders' Equity on the
|| || || || || || || || || || || || || || || || || ||
Liabilities & Shareholders' Equity side is down by $6 and both sides of the Balance Sheet
|| || || || || || || || || || || || || || || ||
balance. Note: With this type of question I always recommend going in the order: 1. Income
|| || || || || || || || || || || || || || || ||
Statement 2. Cash Flow Statement 3. Balance Sheet This is so you can check yourself at the end
|| || || || || || || || || || || || || || || || || ||
and make sure the Balance Sheet balances. Remember that an Asset going up decreases your
|| || || || || || || || || || || || || || ||
Cash Flow, whereas a Liability going up increases your Cash Flow.
|| || || || || || || || || ||
If Depreciation is a non-cash expense, why does it affect the cash balance? - ✔✔Although
|| || || || || || || || || || || || || || ||
Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense, || || || || || || || || || || || || || ||
Depreciation affects cash by reducing the amount of taxes you pay || || || || || || || || || ||
Where does Depreciation usually show up on the Income Statement? - ✔✔It could be in a
|| || || || || || || || || || || || || || || ||
separate line item, or it could be embedded in Cost of Goods Sold or Operating Expenses - every
|| || || || || || || || || || || || || || || || || ||
company does it differently. Note that the end result for accounting questions is the same:
|| || || || || || || || || || || || || || ||
Depreciation always reduces Pre-Tax Income. || || || ||
What happens when Accrued Compensation goes up by $10? - ✔✔For this question, confirm that
|| || || || || || || || || || || || || ||
the accrued compensation is now being recognized as an expense (as opposed to just changing
|| || || || || || || || || || || || || || || ||
non-accrued to accrued compensation). Assuming that's the case, Operating Expenses on the || || || || || || || || || || || ||
Income Statement go up by $10, Pre-Tax Income falls by $10, and Net Income falls by $6
|| || || || || || || || || || || || || || || || ||
(assuming a 40% tax rate). On the Cash Flow Statement, Net Income is down by $6, and Accrued
|| || || || || || || || || || || || || || || || || ||
Compensation will increase Cash Flow by $10, so overall Cash Flow from Operations is up by $4 || || || || || || || || || || || || || || || || ||
accurate detailed answers || ||
Walk me through the 3 financial statements - ✔✔The 3 major financial statements are the Income
|| || || || || || || || || || || || || || || ||
Statement, Balance Sheet and Cash Flow Statement. The Income Statement gives the company's || || || || || || || || || || || || ||
revenue and expenses, and goes down to Net Income, the final line on the statement. The Balance
|| || || || || || || || || || || || || || || || ||
Sheet shows the company's Assets - its resources - such as Cash, Inventory and PP&E, as well as
|| || || || || || || || || || || || || || || || || ||
its Liabilities - such as Debt and Accounts Payable - and Shareholders' Equity. Assets must equal
|| || || || || || || || || || || || || || || ||
Liabilities plus Shareholders' Equity. The Cash Flow Statement begins with Net Income, 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; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); || || || || || || || || || || || ||
Operating Income; Pretax Income; Net Income. http://breakingintowallstreet.com || || || || || || ||
http://www.mergersandinquisitions.com 7 Balance Sheet: Cash; Accounts Receivable; Inventory; || || || || || || || ||
Plants, Property & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt;
|| || || || || || || || || ||
Shareholders' Equity. Cash Flow Statement: 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 do the 3 statements link together? - ✔✔To tie the statements together, Net Income from the
|| || || || || || || || || || || || || || || || ||
Income Statement flows into Shareholders' Equity on the Balance Sheet, and into the top line of
|| || || || || || || || || || || || || || || ||
the Cash Flow Statement. Changes to Balance Sheet items appear as working capital changes on
|| || || || || || || || || || || || || || ||
the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such
|| || || || || || || || || || || || || ||
as PP&E, Debt and Shareholders' Equity. The Cash and Shareholders' Equity items on the
|| || || || || || || || || || || || || ||
Balance Sheet act as "plugs," with Cash flowing in from the final line on the Cash Flow
|| || || || || || || || || || || || || || || || ||
Statement.
If I were stranded on a desert island, only had 1 statement and I wanted to review the overall
|| || || || || || || || || || || || || || || || || || ||
health of a company - which statement would I use and why? - ✔✔You would use the Cash Flow
|| || || || || || || || || || || || || || || || || || ||
Statement because it gives a true picture of how much cash the company is actually generating,
|| || || || || || || || || || || || || || || ||
independent of all the non-cash expenses you might have. And that's the #1 thing you care about || || || || || || || || || || || || || || || || ||
when analyzing the overall financial health of any business - its cash flow.
|| || || || || || || || || || || ||
, Let's say I could only look at 2 statements to assess a company's prospects - which 2 would I use
|| || || || || || || || || || || || || || || || || || || ||
and why? - ✔✔You would pick the Income Statement and Balance Sheet, because you can create
|| || || || || || || || || || || || || || || ||
the Cash Flow Statement from both of those (assuming, of course that you have "before" and
|| || || || || || || || || || || || || || || ||
"after" versions of the Balance Sheet that correspond to the same period the Income Statement is
|| || || || || || || || || || || || || || || ||
tracking).
. Walk me through how Depreciation going up by $10 would affect the statements. - ✔✔Income
|| || || || || || || || || || || || || || || ||
Statement: Operating Income would decline by $10 and assuming a 40% tax rate, Net Income || || || || || || || || || || || || || || ||
would go down by $6. Cash Flow Statement: The Net Income at the top goes down by $6, but the
|| || || || || || || || || || || || || || || || || || || ||
$10 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from
|| || || || || || || || || || || || || || ||
Operations goes up by $4. There are no changes elsewhere, so the overall Net Change in Cash || || || || || || || || || || || || || || || || ||
goes up by $4. Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets side
|| || || || || || || || || || || || || || || || ||
because of the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement.
|| || || || || || || || || || || || || || || || || || ||
Overall, Assets is down by $6. Since Net Income fell by $6 as well, Shareholders' Equity on the
|| || || || || || || || || || || || || || || || || ||
Liabilities & Shareholders' Equity side is down by $6 and both sides of the Balance Sheet
|| || || || || || || || || || || || || || || ||
balance. Note: With this type of question I always recommend going in the order: 1. Income
|| || || || || || || || || || || || || || || ||
Statement 2. Cash Flow Statement 3. Balance Sheet This is so you can check yourself at the end
|| || || || || || || || || || || || || || || || || ||
and make sure the Balance Sheet balances. Remember that an Asset going up decreases your
|| || || || || || || || || || || || || || ||
Cash Flow, whereas a Liability going up increases your Cash Flow.
|| || || || || || || || || ||
If Depreciation is a non-cash expense, why does it affect the cash balance? - ✔✔Although
|| || || || || || || || || || || || || || ||
Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense, || || || || || || || || || || || || || ||
Depreciation affects cash by reducing the amount of taxes you pay || || || || || || || || || ||
Where does Depreciation usually show up on the Income Statement? - ✔✔It could be in a
|| || || || || || || || || || || || || || || ||
separate line item, or it could be embedded in Cost of Goods Sold or Operating Expenses - every
|| || || || || || || || || || || || || || || || || ||
company does it differently. Note that the end result for accounting questions is the same:
|| || || || || || || || || || || || || || ||
Depreciation always reduces Pre-Tax Income. || || || ||
What happens when Accrued Compensation goes up by $10? - ✔✔For this question, confirm that
|| || || || || || || || || || || || || ||
the accrued compensation is now being recognized as an expense (as opposed to just changing
|| || || || || || || || || || || || || || || ||
non-accrued to accrued compensation). Assuming that's the case, Operating Expenses on the || || || || || || || || || || || ||
Income Statement go up by $10, Pre-Tax Income falls by $10, and Net Income falls by $6
|| || || || || || || || || || || || || || || || ||
(assuming a 40% tax rate). On the Cash Flow Statement, Net Income is down by $6, and Accrued
|| || || || || || || || || || || || || || || || || ||
Compensation will increase Cash Flow by $10, so overall Cash Flow from Operations is up by $4 || || || || || || || || || || || || || || || || ||
