BIWS 400 Exam Questions with Correct Answers| New Update 100% Verified by Experts
Walk me through the 3 financial statements The 3 major financial statements are 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 resource--such as Cash, Inventory, and
PP&E, as well as its Liabilities--such as Debt and Accounts Payable--and Shareholder's Equity.
Assets must equal Liabilities plus Shareholder's 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 companies net change in cash.
Can you give examples of major line items on each of the financial statements? IS: Revenue,
COGS, SG&A, Operating Income, Pretax income, Net Income
BS: Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued Expenses, Debt,
Shareholders Equity
Cash Flow Statement: Net Income, Depreciation and Amortization, Stock-Based Compensation,
Changes in Operating Assets & Liabilities, CFO, Capital Expenditures, CFI, Sale/Purchase of
Securities, Dividends Issued, Cash Flow from Financing.
How do the 3 statements link together? 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.
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
Shareholder's Equity. The Cash and Shareholder's 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 tax rate of 21%, Net
income would decline by $7.90.
CFS: Net Income at the top should decline by $7.90, but the $10 Depreciation is a non-cash
expense that gets added back, so overall CFO goes up by $2.10. There are no changes
elsewhere, so overall Net Change in Cash goes up by $2.10.
BS: PPE goes down by $10 in Assets bc of Depreciation, and Cash is up by $2.10 from changes
on the CFS.
Overall, Assets is down by $7.90. Since Net income decreased by $7.90 as well, S/E on the
Liabilities&S/E is down by $7.90 and the BS is balanced.
If Depreciation is a non-cash expense, why does it affect the cash balance? Depreciation is a
non-cash expense, but 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 can be in a separate
line item, or it could be embedded in COGS or Operating Expenses--every company will do it
differently. (But Depreciation always reduced Pre-tax income.)
What happens when Accrued Compensation goes up by $10? (First confirm that accrued
compensation is now being recognized as an expense (as opposed to just changing non-accrued
to accrued compensation). Assuming that's the case:
OpEx on IS goes up by $10, Pre-tax income falls by $10, and NI falls by $7.90 (21% tax rate)
CFS: NI is down by $7.90, and Accrued Compensation will increase cash flow by $10, so overall
CFO is up by $2.10, and the net change in cash at the bottom is $2.10.
BS: Cash is up by $2.10, so Assets are up by $2.10. On L&E side, Accrued Comp is a liability so
Liabilities are up by $10 and R/E are down by $7.90 due to NI, so it balances.
,What happens when Inventory goes up by $10, assuming you pay for it with cash? No
changes to Income Statement.
CFS: Inventory is an asset so that decreases CFO by $10, thus same with net change in cash.
BS: Inventory(A) is up by $10 but Cash(A) is down by $10, so it balances.
Why is the Income Statement not affected by changes in Inventory? The expense is only
recorded when the goods associated with it are sold, so if it's just sitting in a warehouse, it
doesn't count as COGS or OpEx until the company manufactures it into a product and sells it.
Let's say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements
affected at the start of "Year 1," before anything else happens? IS: At the start of year 1
there are no changes to the IS.
CFS: The additional investments in factories would show up under CFI as a net reduction in CF
by $100. The additional $100 of debt raised would show up as an addition to CF, cancelling out
the investments activity, sot NCIC is the same.
BS: PPE(A) goes up by $100 and Debt(L) goes up by $100, so it balances.
Now let's go out 1 year to the start of year 2. Assume the debt is high-yield so no principal is
paid off, and assume an interest rate of 10%. Also assume factories depreciate at a rate of
10%/year. What happens? After a year Apple must pay interest expense and record the
depreciation.
IS: OpIn decreases by $10 dues to 10% depreciation, and the additional $10 in interest expense
would decrease the pre-tax income by $20 altogether. ($10 from depreciation and $10 from
Interest)
With a tax rate of %21, NI falls by $15.80 (79% of 20).
CFS: Ni at the top is down by $12. Depreciation is a non-cash expense, so you add it back and
the end result is CFO is down by $5.80. NCIC is $5.80.
BS: Cash(A) is down by $5.80 and PPE(A) is down by $10 (depreciation). S/E is down by $15.80
due to NI, so both sides balance.
(Debt under liabilities doesn't change bc we assume it's not paid back)
, At the start of Year 3, the factories all break down and the value of the equipment is written
down to $0. The loan must all be paid back now. What happens? After 2 years, the value of
the factories is now $80 due to deprecation. So this $80 is what we write down.
IS: $80 write-down shows up on pre-tax income. With 21% tax rate, NI decreases by $63.20
(79%*$80)
CFS: Ni is down by $63.20, but the write-down is a non-cash expense, so we add it back--thus
CFO is up by $16.80.
There are no changes under CFI, but under CFF there is $100 decrease from the loan payback,
so NCIC is $83.20.
BS: Cash(A) is now down by $83.20 and PPE(A) is down by $80, so Assets are down by $163.20
overall.
Debt(L) is down by $100 bc it was paid off, and since NI was down by $63.20, S/E is down by
$63.20 as well. Overall, L&S/E is down by $163.20, and both sides balance.
Now let's look at a different scenario and assume Apple is ordering $10 of additional iPod
inventory using cash on hand. They order the inventory, but they have not manufactured or
sold anything yet--what happens to the statements? IS: No change
CFS: Inventory is up by $10, thus CFO decreases by $10. NCIC is down by $10.
BS: Inventory(A) s up by $10 and Cash(A) is down by $10 so it balances.
Now let's say they sell the iPods for revenue of $20, at a cost of $10. Walk me through the 3
statements under this scenario. IS: Revenue is up by $20 and COGS is up by $10, so Gross
Profit is up by $10 and so is Operating Income. With a 21% tax rate, NI is up by $7.90
CFS: NI is up by $7.90 and Inventory has degreased by $10, which is an addition to CF, so CFO is
up $17.90 overall.
NCIC is $17.90
BS: Cash(A) is up by $17.90 and Inventory(A) is down by $10, so Assets are up $7.90. Ni was up
by $7.90, so so is S/E, and both sides balance.
Could you ever end up with negative S/E? What does that mean? Yes, it is common to see
this in 2 scenarios:
Walk me through the 3 financial statements The 3 major financial statements are 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 resource--such as Cash, Inventory, and
PP&E, as well as its Liabilities--such as Debt and Accounts Payable--and Shareholder's Equity.
Assets must equal Liabilities plus Shareholder's 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 companies net change in cash.
Can you give examples of major line items on each of the financial statements? IS: Revenue,
COGS, SG&A, Operating Income, Pretax income, Net Income
BS: Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued Expenses, Debt,
Shareholders Equity
Cash Flow Statement: Net Income, Depreciation and Amortization, Stock-Based Compensation,
Changes in Operating Assets & Liabilities, CFO, Capital Expenditures, CFI, Sale/Purchase of
Securities, Dividends Issued, Cash Flow from Financing.
How do the 3 statements link together? 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.
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
Shareholder's Equity. The Cash and Shareholder's 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 tax rate of 21%, Net
income would decline by $7.90.
CFS: Net Income at the top should decline by $7.90, but the $10 Depreciation is a non-cash
expense that gets added back, so overall CFO goes up by $2.10. There are no changes
elsewhere, so overall Net Change in Cash goes up by $2.10.
BS: PPE goes down by $10 in Assets bc of Depreciation, and Cash is up by $2.10 from changes
on the CFS.
Overall, Assets is down by $7.90. Since Net income decreased by $7.90 as well, S/E on the
Liabilities&S/E is down by $7.90 and the BS is balanced.
If Depreciation is a non-cash expense, why does it affect the cash balance? Depreciation is a
non-cash expense, but 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 can be in a separate
line item, or it could be embedded in COGS or Operating Expenses--every company will do it
differently. (But Depreciation always reduced Pre-tax income.)
What happens when Accrued Compensation goes up by $10? (First confirm that accrued
compensation is now being recognized as an expense (as opposed to just changing non-accrued
to accrued compensation). Assuming that's the case:
OpEx on IS goes up by $10, Pre-tax income falls by $10, and NI falls by $7.90 (21% tax rate)
CFS: NI is down by $7.90, and Accrued Compensation will increase cash flow by $10, so overall
CFO is up by $2.10, and the net change in cash at the bottom is $2.10.
BS: Cash is up by $2.10, so Assets are up by $2.10. On L&E side, Accrued Comp is a liability so
Liabilities are up by $10 and R/E are down by $7.90 due to NI, so it balances.
,What happens when Inventory goes up by $10, assuming you pay for it with cash? No
changes to Income Statement.
CFS: Inventory is an asset so that decreases CFO by $10, thus same with net change in cash.
BS: Inventory(A) is up by $10 but Cash(A) is down by $10, so it balances.
Why is the Income Statement not affected by changes in Inventory? The expense is only
recorded when the goods associated with it are sold, so if it's just sitting in a warehouse, it
doesn't count as COGS or OpEx until the company manufactures it into a product and sells it.
Let's say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements
affected at the start of "Year 1," before anything else happens? IS: At the start of year 1
there are no changes to the IS.
CFS: The additional investments in factories would show up under CFI as a net reduction in CF
by $100. The additional $100 of debt raised would show up as an addition to CF, cancelling out
the investments activity, sot NCIC is the same.
BS: PPE(A) goes up by $100 and Debt(L) goes up by $100, so it balances.
Now let's go out 1 year to the start of year 2. Assume the debt is high-yield so no principal is
paid off, and assume an interest rate of 10%. Also assume factories depreciate at a rate of
10%/year. What happens? After a year Apple must pay interest expense and record the
depreciation.
IS: OpIn decreases by $10 dues to 10% depreciation, and the additional $10 in interest expense
would decrease the pre-tax income by $20 altogether. ($10 from depreciation and $10 from
Interest)
With a tax rate of %21, NI falls by $15.80 (79% of 20).
CFS: Ni at the top is down by $12. Depreciation is a non-cash expense, so you add it back and
the end result is CFO is down by $5.80. NCIC is $5.80.
BS: Cash(A) is down by $5.80 and PPE(A) is down by $10 (depreciation). S/E is down by $15.80
due to NI, so both sides balance.
(Debt under liabilities doesn't change bc we assume it's not paid back)
, At the start of Year 3, the factories all break down and the value of the equipment is written
down to $0. The loan must all be paid back now. What happens? After 2 years, the value of
the factories is now $80 due to deprecation. So this $80 is what we write down.
IS: $80 write-down shows up on pre-tax income. With 21% tax rate, NI decreases by $63.20
(79%*$80)
CFS: Ni is down by $63.20, but the write-down is a non-cash expense, so we add it back--thus
CFO is up by $16.80.
There are no changes under CFI, but under CFF there is $100 decrease from the loan payback,
so NCIC is $83.20.
BS: Cash(A) is now down by $83.20 and PPE(A) is down by $80, so Assets are down by $163.20
overall.
Debt(L) is down by $100 bc it was paid off, and since NI was down by $63.20, S/E is down by
$63.20 as well. Overall, L&S/E is down by $163.20, and both sides balance.
Now let's look at a different scenario and assume Apple is ordering $10 of additional iPod
inventory using cash on hand. They order the inventory, but they have not manufactured or
sold anything yet--what happens to the statements? IS: No change
CFS: Inventory is up by $10, thus CFO decreases by $10. NCIC is down by $10.
BS: Inventory(A) s up by $10 and Cash(A) is down by $10 so it balances.
Now let's say they sell the iPods for revenue of $20, at a cost of $10. Walk me through the 3
statements under this scenario. IS: Revenue is up by $20 and COGS is up by $10, so Gross
Profit is up by $10 and so is Operating Income. With a 21% tax rate, NI is up by $7.90
CFS: NI is up by $7.90 and Inventory has degreased by $10, which is an addition to CF, so CFO is
up $17.90 overall.
NCIC is $17.90
BS: Cash(A) is up by $17.90 and Inventory(A) is down by $10, so Assets are up $7.90. Ni was up
by $7.90, so so is S/E, and both sides balance.
Could you ever end up with negative S/E? What does that mean? Yes, it is common to see
this in 2 scenarios:
