M&I 400 Test Questions with Verified Answers
Walk me through the 3 financial statements. - - Liabilities & Shareholders' Equity-
The 3 major financial statements are the 1. Accounts payable
1. Income Statement 2. Accrued expenses
2. Balance Sheet 3. Non-current liabilities (debt, bonds issued,
3. Cash Flow Statement mortgage, loans)
The Income Statement gives the company's revenue 1. Common stock
and expenses, and goes down to Net Income. 2. Retained earnings
The Balance Sheet shows the company's Assets- it's Cash Flow Statement:
resources- such as Cash, Inventory and PP&E, Cash and Cash Equivalents, beginning of the year
as well as its Liabilities- such as Debt and Accounts (from B.S.)
Payable-
and Shareholders' Equity. Operating Activities-
Net income
Assets= Liabilities+Shareholders' Equity
Non-cash expense
The Cash Flow Statement begins with Net Income, 1. D&A (A)
adjusts for non-cash expenses and working capital 2. Stock-based compensation expense
changes, and then lists cash flow from investing and 3. Provision for deferred income taxes
financing activities; at the end, you see the 4. Loss on disposition of PP&E
company's net change in cash.
Changes in operating assets and liabilities-
1. Accounts Receivable
Can you give examples of major line items on each 2. Inventories
of the financial statements? - -Income 3. Other current assets
Statement: 4. Other assets
1. Revenue 5. Accounts payable
2. COGS (cost of goods sold) 6. Deferred revenue
3. Gross Margin 7. Other liabilities
4. Operating Expenses (R&D, SG&A)
5. Operating Income CASH FLOW FROM OPERATIONS
6. Other Income and Expense
7. Pretax Income Investing Activities (CAPITAL EXPENDITURES)-
8. Provision for Income Taxes 1. Purchases of short-term investments
9. Net Income 2. Proceeds from maturities of short-term investments
10. Earnings per common share 3. Proceeds from sale of short-term investments
Balance Sheet: 4. Purchases of long-term investments
Assets- 5. Payments made in connection with business
1. Cash and cash equivalents acquisitions
2. Short-term investments 6. Payment for acquisition of PP&E
3. Accounts receivable 7. Payment for acquisition of intangible assets
4. Inventories
5. Deferred tax asset CASH FLOW FROM INVESTING
1. PP&E Financing Activities (SALE/PURCHASE OF
2. Goodwill SECURITIES) -
3. Acquired intangible assets (patents & copyrights) 1. Proceeds from issuance of common stock
(DIVIDENDS ISSUED)
, M&I 400 Test Questions with Verified Answers
why? - -The Income Statement and Balance
CASH FLOW FROM FINANCING Sheet because you can create the Cash Flow
Statement from both of those.
How do the 3 statements link together? - -1.
The net income from the Income Statement, after the Walk me through how Depreciation going up by $10
payment of any dividends, is added to retained would affect the statements. - -Income
earnings on the Balance Sheet. Statement:
2. Debt on the Balance Sheet is used to calculate the Operating Income would decline by $10 and
interest expense on the Income Statement. assuming a 40% tax rate, Net Income would go down
3. PP&E will be used to calculate any depreciation by $6.
expense.
4. The beginning cash on the Cash Flow Statement Cash Flow Statement: The Net Income at the top
comes from the previous period's Balance Sheet. goes down by $6, but the $10 Depreciation is a non-
5. Cash from operations on the Cash Flow Statement cash expense that gets added back, so overall Cash
is affected by the Balance Sheet's numbers for Flow from Operations goes up by $4.
changes in working capital.
6. PP&E is another Balance Sheet item that affects There is no changes elsewhere, so the overall Net
the CF Statement because depreciation is based on Change in Cash goes up by $4.
the amount of PP&E a company has.
7. Any change due to the purchase or sale of PP&E Balance Sheet: PP&E goes down by $10 on the
with affect cash from investing. Assets side because of the Depreciation, and Cash is
up by $4 from the changes on the Cash Flow
8. The CF Statement's ending cash balance Statement.
becomes the beginning cash balance on the new
Balance Sheet. 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
If I were stranded on a desert island, only had 1 sides of the Balance Sheet balance.
statement and I wanted to review the overall health
of a company-- which statement would I use and
why? - -The Cash Flow Statement because it If Depreciation is a non-cash expense, why does it
gives a true picture of how much cash the company affect the cash balance? - -Although
is actually generating, independent of all the non- Depreciation is a non-cash expense, it is TAX-
cash expenses you might have. DEDUCTIBLE. Since taxes are a cash expense,
Depreciation affects cash by reducing the amount of
Cash is the #1 thing you care about when analyzing taxes you pay.
the overall financial health of any business.
The Income Statement can be misleading due to any Where does Depreciation usually show up on the
number of non-cash expenses that may not truly be Income Statement? - -It could be in a (1)
affecting the overall business. And the Balance separate line item, or it could be embedded in (2)
Sheet alone just shows a snapshot of the company COGS or (3) Operating Expenses-- every company
at one point in time, without showing how operations does it differently.
are actually performing.
The end result is always the same: Depreciation
always reduces PRE-TAX INCOME.
Let's say I could only look at 2 statements to assess
a company's prospects-- which 2 would I use and
, M&I 400 Test Questions with Verified Answers
What happens when Accrued Compensation goes up
by $10? - -Assuming that accrued Let's say Apple is buying $100 worth of new iPad
compensation is now being recognized as an factories with debt. How are all 3 statements affected
expense, at the start of "Year 1," before anything else
happens? - -Income Statement-
Income Statement- At the start of "Year 1," before anything else has
OPERATING EXPENSES goes up by $10, Pre-Tax happened, there would be no changes on Apple's
Income falls by $10, and Net Income falls by $6 Income Statement yet.
(assuming a 40% tax rate).
Cash Flow Statement-
Cash Flow Statement- The additional investment in factories would show up
Net Income goes down by $6, Accrued under Cash Flow from Investing as a net
Compensation will INCREASE cash flow by $10, so REDUCTION in Cash Flow (so Cash Flow is down by
overall Cash Flow from Operations is up by $4 and $100 so far). And the additional $100 worth of debt
the Net Change in Cash at the bottom is up by $4. raised would show up as an ADDITION to Cash Flow,
canceling out the investment activity. So the cash
Balance Sheet- number stays the same.
Cash is up by $4 as a result, so Assets are up by $4.
On the Liabilities & Equity side, Accrued Balance Sheet-
Compensation is a liability so Liabilities are up by PP&E goes up by $100 and Assets is therefore up by
$10 and Retained Earnings are down by $6 due to $100.
the Net Income, so both sides balance. On the other side, debt is up by $100 so both sides
balance.
LIABILITIES ARE POSITIVE.
Now let's go out 1 year, to the start of Year 2.
What happens when Inventory goes up by $10, Assume the debt is high-yield so no principal is paid
assuming you pay for it with cash? - -Income off, and assume an interest rate of 10%. Also assume
Statement- the factories depreciate at a rate of 10% per year.
No changes What happens? - -After a year has passed,
Apple must pay interest expense and must record the
Cash Flow Statement- depreciation.
Inventory is an asset so that DECREASES your
Cash Flow from Operations-- it goes down by $10, as Operating Income would decrease by $10 due to the
does the Net Change in Cash at the bottom. 10% depreciation charge each year, and the $10 in
additional Interest Expense would decrease the Pre-
Balance Sheet- Tax Income by $20 altogether.
Assets: Inventory is up by $10 but Cash is down by
$10, so the changes cancel out and Assets still Assuming a tax rate of 40%, Net Income would fall by
equals Liabilities & Shareholders' Equity. $12.
Cash Flow Statement- Net Income at the top is down
Why is the Income Statement not affected by by $12. Depreciation is a non-cash expense, so you
changes in inventory? - -In the case of add it back and the result is that Cash Flow from
inventory, the expense is only recorded when the Operations is down by $2.
goods associated with it ARE SOLD-- so if it's just
sitting in a warehouse, it does not count as a Cost of That's the only change on the Cash Flow Statement,
Good Sold or Operating Expense until the company so overall Cash is down by $2.
manufactures it into a product and sells it.
Balance Sheet-
Walk me through the 3 financial statements. - - Liabilities & Shareholders' Equity-
The 3 major financial statements are the 1. Accounts payable
1. Income Statement 2. Accrued expenses
2. Balance Sheet 3. Non-current liabilities (debt, bonds issued,
3. Cash Flow Statement mortgage, loans)
The Income Statement gives the company's revenue 1. Common stock
and expenses, and goes down to Net Income. 2. Retained earnings
The Balance Sheet shows the company's Assets- it's Cash Flow Statement:
resources- such as Cash, Inventory and PP&E, Cash and Cash Equivalents, beginning of the year
as well as its Liabilities- such as Debt and Accounts (from B.S.)
Payable-
and Shareholders' Equity. Operating Activities-
Net income
Assets= Liabilities+Shareholders' Equity
Non-cash expense
The Cash Flow Statement begins with Net Income, 1. D&A (A)
adjusts for non-cash expenses and working capital 2. Stock-based compensation expense
changes, and then lists cash flow from investing and 3. Provision for deferred income taxes
financing activities; at the end, you see the 4. Loss on disposition of PP&E
company's net change in cash.
Changes in operating assets and liabilities-
1. Accounts Receivable
Can you give examples of major line items on each 2. Inventories
of the financial statements? - -Income 3. Other current assets
Statement: 4. Other assets
1. Revenue 5. Accounts payable
2. COGS (cost of goods sold) 6. Deferred revenue
3. Gross Margin 7. Other liabilities
4. Operating Expenses (R&D, SG&A)
5. Operating Income CASH FLOW FROM OPERATIONS
6. Other Income and Expense
7. Pretax Income Investing Activities (CAPITAL EXPENDITURES)-
8. Provision for Income Taxes 1. Purchases of short-term investments
9. Net Income 2. Proceeds from maturities of short-term investments
10. Earnings per common share 3. Proceeds from sale of short-term investments
Balance Sheet: 4. Purchases of long-term investments
Assets- 5. Payments made in connection with business
1. Cash and cash equivalents acquisitions
2. Short-term investments 6. Payment for acquisition of PP&E
3. Accounts receivable 7. Payment for acquisition of intangible assets
4. Inventories
5. Deferred tax asset CASH FLOW FROM INVESTING
1. PP&E Financing Activities (SALE/PURCHASE OF
2. Goodwill SECURITIES) -
3. Acquired intangible assets (patents & copyrights) 1. Proceeds from issuance of common stock
(DIVIDENDS ISSUED)
, M&I 400 Test Questions with Verified Answers
why? - -The Income Statement and Balance
CASH FLOW FROM FINANCING Sheet because you can create the Cash Flow
Statement from both of those.
How do the 3 statements link together? - -1.
The net income from the Income Statement, after the Walk me through how Depreciation going up by $10
payment of any dividends, is added to retained would affect the statements. - -Income
earnings on the Balance Sheet. Statement:
2. Debt on the Balance Sheet is used to calculate the Operating Income would decline by $10 and
interest expense on the Income Statement. assuming a 40% tax rate, Net Income would go down
3. PP&E will be used to calculate any depreciation by $6.
expense.
4. The beginning cash on the Cash Flow Statement Cash Flow Statement: The Net Income at the top
comes from the previous period's Balance Sheet. goes down by $6, but the $10 Depreciation is a non-
5. Cash from operations on the Cash Flow Statement cash expense that gets added back, so overall Cash
is affected by the Balance Sheet's numbers for Flow from Operations goes up by $4.
changes in working capital.
6. PP&E is another Balance Sheet item that affects There is no changes elsewhere, so the overall Net
the CF Statement because depreciation is based on Change in Cash goes up by $4.
the amount of PP&E a company has.
7. Any change due to the purchase or sale of PP&E Balance Sheet: PP&E goes down by $10 on the
with affect cash from investing. Assets side because of the Depreciation, and Cash is
up by $4 from the changes on the Cash Flow
8. The CF Statement's ending cash balance Statement.
becomes the beginning cash balance on the new
Balance Sheet. 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
If I were stranded on a desert island, only had 1 sides of the Balance Sheet balance.
statement and I wanted to review the overall health
of a company-- which statement would I use and
why? - -The Cash Flow Statement because it If Depreciation is a non-cash expense, why does it
gives a true picture of how much cash the company affect the cash balance? - -Although
is actually generating, independent of all the non- Depreciation is a non-cash expense, it is TAX-
cash expenses you might have. DEDUCTIBLE. Since taxes are a cash expense,
Depreciation affects cash by reducing the amount of
Cash is the #1 thing you care about when analyzing taxes you pay.
the overall financial health of any business.
The Income Statement can be misleading due to any Where does Depreciation usually show up on the
number of non-cash expenses that may not truly be Income Statement? - -It could be in a (1)
affecting the overall business. And the Balance separate line item, or it could be embedded in (2)
Sheet alone just shows a snapshot of the company COGS or (3) Operating Expenses-- every company
at one point in time, without showing how operations does it differently.
are actually performing.
The end result is always the same: Depreciation
always reduces PRE-TAX INCOME.
Let's say I could only look at 2 statements to assess
a company's prospects-- which 2 would I use and
, M&I 400 Test Questions with Verified Answers
What happens when Accrued Compensation goes up
by $10? - -Assuming that accrued Let's say Apple is buying $100 worth of new iPad
compensation is now being recognized as an factories with debt. How are all 3 statements affected
expense, at the start of "Year 1," before anything else
happens? - -Income Statement-
Income Statement- At the start of "Year 1," before anything else has
OPERATING EXPENSES goes up by $10, Pre-Tax happened, there would be no changes on Apple's
Income falls by $10, and Net Income falls by $6 Income Statement yet.
(assuming a 40% tax rate).
Cash Flow Statement-
Cash Flow Statement- The additional investment in factories would show up
Net Income goes down by $6, Accrued under Cash Flow from Investing as a net
Compensation will INCREASE cash flow by $10, so REDUCTION in Cash Flow (so Cash Flow is down by
overall Cash Flow from Operations is up by $4 and $100 so far). And the additional $100 worth of debt
the Net Change in Cash at the bottom is up by $4. raised would show up as an ADDITION to Cash Flow,
canceling out the investment activity. So the cash
Balance Sheet- number stays the same.
Cash is up by $4 as a result, so Assets are up by $4.
On the Liabilities & Equity side, Accrued Balance Sheet-
Compensation is a liability so Liabilities are up by PP&E goes up by $100 and Assets is therefore up by
$10 and Retained Earnings are down by $6 due to $100.
the Net Income, so both sides balance. On the other side, debt is up by $100 so both sides
balance.
LIABILITIES ARE POSITIVE.
Now let's go out 1 year, to the start of Year 2.
What happens when Inventory goes up by $10, Assume the debt is high-yield so no principal is paid
assuming you pay for it with cash? - -Income off, and assume an interest rate of 10%. Also assume
Statement- the factories depreciate at a rate of 10% per year.
No changes What happens? - -After a year has passed,
Apple must pay interest expense and must record the
Cash Flow Statement- depreciation.
Inventory is an asset so that DECREASES your
Cash Flow from Operations-- it goes down by $10, as Operating Income would decrease by $10 due to the
does the Net Change in Cash at the bottom. 10% depreciation charge each year, and the $10 in
additional Interest Expense would decrease the Pre-
Balance Sheet- Tax Income by $20 altogether.
Assets: Inventory is up by $10 but Cash is down by
$10, so the changes cancel out and Assets still Assuming a tax rate of 40%, Net Income would fall by
equals Liabilities & Shareholders' Equity. $12.
Cash Flow Statement- Net Income at the top is down
Why is the Income Statement not affected by by $12. Depreciation is a non-cash expense, so you
changes in inventory? - -In the case of add it back and the result is that Cash Flow from
inventory, the expense is only recorded when the Operations is down by $2.
goods associated with it ARE SOLD-- so if it's just
sitting in a warehouse, it does not count as a Cost of That's the only change on the Cash Flow Statement,
Good Sold or Operating Expense until the company so overall Cash is down by $2.
manufactures it into a product and sells it.
Balance Sheet-
