M&I 400 EXAM QUESTIONS WITH
ANSWERS 100% PASS
Walk me through the 3 financial statements. - ANSWER The 3 major financial
statements are the
1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
The Income Statement gives the company's revenue and expenses, and goes
down to Net Income.
The Balance Sheet shows the company's Assets- it's resources- such as Cash,
Inventory and PP&E,
as well as its Liabilities- such as Debt and Accounts Payable-
and Shareholders' Equity.
Assets= Liabilities+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? -
ANSWER Income Statement:
1. Revenue
2. COGS (cost of goods sold)
3. Gross Margin
4. Operating Expenses (R&D, SG&A)
5. Operating Income
6. Other Income and Expense
7. Pretax Income
8. Provision for Income Taxes
9. Net Income
10. Earnings per common share
Balance Sheet:
Assets-
1. Cash and cash equivalents
2. Short-term investments
3. Accounts receivable
4. Inventories
,5. Deferred tax asset
1. PP&E
2. Goodwill
3. Acquired intangible assets (patents & copyrights)
Liabilities & Shareholders' Equity-
1. Accounts payable
2. Accrued expenses
3. Non-current liabilities (debt, bonds issued, mortgage, loans)
1. Common stock
2. Retained earnings
Cash Flow Statement:
Cash and Cash Equivalents, beginning of the year (from B.S.)
Operating Activities-
Net income
Non-cash expense
1. D&A (A)
2. Stock-based compensation expense
3. Provision for deferred income taxes
4. Loss on disposition of PP&E
Changes in operating assets and liabilities-
1. Accounts Receivable
2. Inventories
3. Other current assets
4. Other assets
5. Accounts payable
6. Deferred revenue
7. Other liabilities
CASH FLOW FROM OPERATIONS
Investing Activities (CAPITAL EXPENDITURES)-
1. Purchases of short-term investments
2. Proceeds from maturities of short-term investments
3. Proceeds from sale of short-term investments
4. Purchases of long-term investments
5. Payments made in connection with business acquisitions
6. Payment for acquisition of PP&E
7. Payment for acquisition of intangible assets
,CASH FLOW FROM INVESTING
Financing Activities (SALE/PURCHASE OF SECURITIES) -
1. Proceeds from issuance of common stock (DIVIDENDS ISSUED)
CASH FLOW FROM FINANCING
How do the 3 statements link together? - ANSWER 1. The net income from the
Income Statement, after the payment of any dividends, is added to retained
earnings on the Balance Sheet.
2. Debt on the Balance Sheet is used to calculate the interest expense on the
Income Statement.
3. PP&E will be used to calculate any depreciation expense.
4. The beginning cash on the Cash Flow Statement comes from the previous
period's Balance Sheet.
5. Cash from operations on the Cash Flow Statement is affected by the Balance
Sheet's numbers for changes in working capital.
6. PP&E is another Balance Sheet item that affects the CF Statement because
depreciation is based on the amount of PP&E a company has.
7. Any change due to the purchase or sale of PP&E with affect cash from
investing.
8. The CF Statement's ending cash balance becomes the beginning cash
balance on the new Balance Sheet.
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? -
ANSWER 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.
Cash is the #1 thing you care about when analyzing the overall financial health of
any business.
The Income Statement can be misleading due to any number of non-cash
expenses that may not truly be affecting the overall business. And the Balance
Sheet alone just shows a snapshot of the company at one point in time, without
showing how operations are actually performing.
Let's say I could only look at 2 statements to assess a company's prospects--
which 2 would I use and why? - ANSWER The Income Statement and Balance
Sheet because you can create the Cash Flow Statement from both of those.
, Walk me through how Depreciation going up by $10 would affect the statements.
- ANSWER 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 is no changes elsewhere, so the overall Net Change in Cash goes up by
$4.
Balance Sheet: PP&E 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.
If Depreciation is a non-cash expense, why does it affect the cash balance? -
ANSWER 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? - ANSWER
It could be in a (1) separate line item, or it could be embedded in (2) COGS or (3)
Operating Expenses-- every company does it differently.
The end result is always the same: Depreciation always reduces PRE-TAX
INCOME.
What happens when Accrued Compensation goes up by $10? - ANSWER
Assuming that accrued compensation is now being recognized as an expense,
Income Statement-
OPERATING EXPENSES goes up by $10, Pre-Tax Income falls by $10, and Net
Income falls by $6 (assuming a 40% tax rate).
Cash Flow Statement-
Net Income goes down by $6, Accrued Compensation will INCREASE cash flow
by $10, so overall Cash Flow from Operations is up by $4 and the Net Change in
Cash at the bottom is up by $4.
Balance Sheet-
ANSWERS 100% PASS
Walk me through the 3 financial statements. - ANSWER The 3 major financial
statements are the
1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
The Income Statement gives the company's revenue and expenses, and goes
down to Net Income.
The Balance Sheet shows the company's Assets- it's resources- such as Cash,
Inventory and PP&E,
as well as its Liabilities- such as Debt and Accounts Payable-
and Shareholders' Equity.
Assets= Liabilities+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? -
ANSWER Income Statement:
1. Revenue
2. COGS (cost of goods sold)
3. Gross Margin
4. Operating Expenses (R&D, SG&A)
5. Operating Income
6. Other Income and Expense
7. Pretax Income
8. Provision for Income Taxes
9. Net Income
10. Earnings per common share
Balance Sheet:
Assets-
1. Cash and cash equivalents
2. Short-term investments
3. Accounts receivable
4. Inventories
,5. Deferred tax asset
1. PP&E
2. Goodwill
3. Acquired intangible assets (patents & copyrights)
Liabilities & Shareholders' Equity-
1. Accounts payable
2. Accrued expenses
3. Non-current liabilities (debt, bonds issued, mortgage, loans)
1. Common stock
2. Retained earnings
Cash Flow Statement:
Cash and Cash Equivalents, beginning of the year (from B.S.)
Operating Activities-
Net income
Non-cash expense
1. D&A (A)
2. Stock-based compensation expense
3. Provision for deferred income taxes
4. Loss on disposition of PP&E
Changes in operating assets and liabilities-
1. Accounts Receivable
2. Inventories
3. Other current assets
4. Other assets
5. Accounts payable
6. Deferred revenue
7. Other liabilities
CASH FLOW FROM OPERATIONS
Investing Activities (CAPITAL EXPENDITURES)-
1. Purchases of short-term investments
2. Proceeds from maturities of short-term investments
3. Proceeds from sale of short-term investments
4. Purchases of long-term investments
5. Payments made in connection with business acquisitions
6. Payment for acquisition of PP&E
7. Payment for acquisition of intangible assets
,CASH FLOW FROM INVESTING
Financing Activities (SALE/PURCHASE OF SECURITIES) -
1. Proceeds from issuance of common stock (DIVIDENDS ISSUED)
CASH FLOW FROM FINANCING
How do the 3 statements link together? - ANSWER 1. The net income from the
Income Statement, after the payment of any dividends, is added to retained
earnings on the Balance Sheet.
2. Debt on the Balance Sheet is used to calculate the interest expense on the
Income Statement.
3. PP&E will be used to calculate any depreciation expense.
4. The beginning cash on the Cash Flow Statement comes from the previous
period's Balance Sheet.
5. Cash from operations on the Cash Flow Statement is affected by the Balance
Sheet's numbers for changes in working capital.
6. PP&E is another Balance Sheet item that affects the CF Statement because
depreciation is based on the amount of PP&E a company has.
7. Any change due to the purchase or sale of PP&E with affect cash from
investing.
8. The CF Statement's ending cash balance becomes the beginning cash
balance on the new Balance Sheet.
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? -
ANSWER 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.
Cash is the #1 thing you care about when analyzing the overall financial health of
any business.
The Income Statement can be misleading due to any number of non-cash
expenses that may not truly be affecting the overall business. And the Balance
Sheet alone just shows a snapshot of the company at one point in time, without
showing how operations are actually performing.
Let's say I could only look at 2 statements to assess a company's prospects--
which 2 would I use and why? - ANSWER The Income Statement and Balance
Sheet because you can create the Cash Flow Statement from both of those.
, Walk me through how Depreciation going up by $10 would affect the statements.
- ANSWER 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 is no changes elsewhere, so the overall Net Change in Cash goes up by
$4.
Balance Sheet: PP&E 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.
If Depreciation is a non-cash expense, why does it affect the cash balance? -
ANSWER 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? - ANSWER
It could be in a (1) separate line item, or it could be embedded in (2) COGS or (3)
Operating Expenses-- every company does it differently.
The end result is always the same: Depreciation always reduces PRE-TAX
INCOME.
What happens when Accrued Compensation goes up by $10? - ANSWER
Assuming that accrued compensation is now being recognized as an expense,
Income Statement-
OPERATING EXPENSES goes up by $10, Pre-Tax Income falls by $10, and Net
Income falls by $6 (assuming a 40% tax rate).
Cash Flow Statement-
Net Income goes down by $6, Accrued Compensation will INCREASE cash flow
by $10, so overall Cash Flow from Operations is up by $4 and the Net Change in
Cash at the bottom is up by $4.
Balance Sheet-
