Wall Street Prep Exam Questions and
Answers
Assets
resources a company uses to operate its business
includes cash, A/R, PP&E
Liabilities
represents the company's contractual obligations and includes A/P, debt, accrued expenses
Shareholder's equity
is the residual
the value of the business available to the owners (shareholders) after debts have been paid off
Income statement
illustrates the profitability of the company over a specified period of time
broad sense: shows revenue-expenses
Balance sheet
snapshot of the company economic resources and funding for those resources at a given point in time
(A = L + SE)
Revenue
"top-line"
represents the sale of goods and services
it is recorded when earned (even though cash might not have been received at the time of
transaction)
Expenses
netted against revenue to arrive at net income
COGS (directly associate with good production), SG&A (indirectly associated with production), interest
expense (expense related to paying debt holders periodic payments), taxes, depreciation expense
(non-cash expense accounting for the use of PP&E, often imbedded within COGS and SG&A)
Net income
"bottom-line"
revenue-expenses
the profitability available to common shareholder's after debt payments have been made (interest
expense)
EPS (earnings per share)
, portion of a company's profit allocated to each outstanding share of common stock
EPS = (net income - dividends on preferred stock)/weighted average shares outstanding
Cash flow statement
While cash is not necessarily received when a sale occurs, the income statement still records the sale.
As a result, the income statement captures all the economic transactions of the business.
The cash flow statement is needed because the income statement uses what is called accrual
accounting. In accrual accounting, revenues are recorded when earned regardless of when cash is
received (revenue includes sales using cash and made on credit A/R)
Since we also want to have a clear understanding of the cash position of a company, we need the
statement of cash flows to reconcile the income statement to cash inflows and outflows.
"cash position of the company"
cash from operating activities, cash from investing activities, and cash from financing activities
Cash from operating activities
mostly indirect method
starts with net income and includes the cash effects of transactions involved in calculating net
income. reconciliation of net income.
Net income (income statement)
+ non-cash expenses
- non-cash gains
- period on period increases in working capital assets
+ period on period increases in working capital liability
= CF from operations
*for stable, mature, plain vanilla companies, a positive cash flow from operating activities is desirable
Cash from investing activities
cash related to investments in the business (additional capex or sales of assets)
for stable, mature, plain vanilla a negative cash flow from investing activities is desirable as this
indicates that the company is trying to grow by buying assets
Cash from financing activities
cash related to capital raising and payment of dividends
if the company issues more preferred stock, we will see such an increase in cash in this section
if the company pays out dividends, we will see a cash outflow
for stable, mature plain vanilla companies, there is not a preference for positive or negative cash flow
in this section
Net change in cash over period =
cash from operating activities plus cash from investing activities plus cash from financing activities
Answers
Assets
resources a company uses to operate its business
includes cash, A/R, PP&E
Liabilities
represents the company's contractual obligations and includes A/P, debt, accrued expenses
Shareholder's equity
is the residual
the value of the business available to the owners (shareholders) after debts have been paid off
Income statement
illustrates the profitability of the company over a specified period of time
broad sense: shows revenue-expenses
Balance sheet
snapshot of the company economic resources and funding for those resources at a given point in time
(A = L + SE)
Revenue
"top-line"
represents the sale of goods and services
it is recorded when earned (even though cash might not have been received at the time of
transaction)
Expenses
netted against revenue to arrive at net income
COGS (directly associate with good production), SG&A (indirectly associated with production), interest
expense (expense related to paying debt holders periodic payments), taxes, depreciation expense
(non-cash expense accounting for the use of PP&E, often imbedded within COGS and SG&A)
Net income
"bottom-line"
revenue-expenses
the profitability available to common shareholder's after debt payments have been made (interest
expense)
EPS (earnings per share)
, portion of a company's profit allocated to each outstanding share of common stock
EPS = (net income - dividends on preferred stock)/weighted average shares outstanding
Cash flow statement
While cash is not necessarily received when a sale occurs, the income statement still records the sale.
As a result, the income statement captures all the economic transactions of the business.
The cash flow statement is needed because the income statement uses what is called accrual
accounting. In accrual accounting, revenues are recorded when earned regardless of when cash is
received (revenue includes sales using cash and made on credit A/R)
Since we also want to have a clear understanding of the cash position of a company, we need the
statement of cash flows to reconcile the income statement to cash inflows and outflows.
"cash position of the company"
cash from operating activities, cash from investing activities, and cash from financing activities
Cash from operating activities
mostly indirect method
starts with net income and includes the cash effects of transactions involved in calculating net
income. reconciliation of net income.
Net income (income statement)
+ non-cash expenses
- non-cash gains
- period on period increases in working capital assets
+ period on period increases in working capital liability
= CF from operations
*for stable, mature, plain vanilla companies, a positive cash flow from operating activities is desirable
Cash from investing activities
cash related to investments in the business (additional capex or sales of assets)
for stable, mature, plain vanilla a negative cash flow from investing activities is desirable as this
indicates that the company is trying to grow by buying assets
Cash from financing activities
cash related to capital raising and payment of dividends
if the company issues more preferred stock, we will see such an increase in cash in this section
if the company pays out dividends, we will see a cash outflow
for stable, mature plain vanilla companies, there is not a preference for positive or negative cash flow
in this section
Net change in cash over period =
cash from operating activities plus cash from investing activities plus cash from financing activities
