Investment Banking Exam Prep 2025–2026
|Questions & Answers | A+ Study Guide | Wall
Street Ready
5 most important accounting concepts you need to know
1. The 3 financial statements and what each one means
2. How the 3 statements link together and how to walk through questions where
one or multiple items change
3. Different methods of accounting - cash-based vs. accrual, and determining when
revenue and expenses are recognized
4. When to expense something and when to capitalize it. Not all expenses are
created equal
5. What individual items on the statements, like Goodwill, Other Intangibles and
Shareholders' Equity, actually mean.
1. 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 of the statement.
,The Balance Sheet shows the company's assets - its resources - such as Cash,
Inventory, PP&E, as well as Liabilities such as Debt and Accounts Payable, and
Shareholder's Equity. Assets must equal Liabilities plus Shareholders' Equity.
Lastly, Cash Flow Statement begins with its 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.
2. Can you give examples of major line items on each of the financial statements?
Income Statement has Revenue; Cost of Goods Sold; SG&A (Selling, General, and
Administrative Expenses); Operating Income; Pretax Income; Net Income
Balance Sheet has Cash; Accounts Receivable; Inventory; Plants, Property, and
Equipment; Account Payable; Accrued Expenses; Debt; Shareholders' Equity
Cash Flow Statement has Net Income; Depreciation & Amortization; Stock-Based
Compensation; Changes in Operating Assets and Liabilities; Cash Flow From
Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of
Securities; Dividend Issued; Cash Flow From Financing
3. 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
of the cash flow statement.
4. 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?
It would be the Cash Flow Statement. It's because the Cash Flow Statement shows
the overall and a true picture of how much cash the company is actually
generating, independent of all the non-cash expenses you might have. And that is
the #1 thing you care about when analyzing the overall financial health of any
business - its cash flow.
5. 2 statements to access a company's prospects - which 2 would I use and why?
It would be the Income statement and Balance Sheet. Because you can create the
cash flow statement using those two statements (with an assumption that you have
"before" and "after" versions of the Balance sheet that correspond to the same
period the Income Statement is tracking).
6. Walk me through how Depreciation going up by $10 would affect the statements
, Income Statement Operating Income would go down by $10, and assuming the
income tax is 40%, the net income would decline by $6.
Cash Flow Statement now starts with the net income that is $6 lower than before.
However, since depreciation $10 is non-cash expense, it would be added back;
therefore, the overall net cash would be up by $4.
Lastly, Balance Sheet's asset - PP&E - is down by $10 however the Cash is up by
$4 due to the Cash Flow Statement.
Overall, Assets is down by $6. Since Net Income fell by $6, Shareholders' Equity
on the Liabilities & Shareholders' Equity side is down by $6 and both sides of the
Balance Sheet balance.
Always, go with Income statement -> Cash Flow Statement -> Balance Sheet
*Asset going up decreases Cash Flow, whereas a Liabilities going up increases
your Cash Flow*
7. If Depreciation is a non-cash expense, why does it affect the cash balance?
Although Depreciation is non-cash expense, it is tax-deductible. Since taxes are a
cash expense, Depreciation affects cash by reducing the amount of taxes you pay.
|Questions & Answers | A+ Study Guide | Wall
Street Ready
5 most important accounting concepts you need to know
1. The 3 financial statements and what each one means
2. How the 3 statements link together and how to walk through questions where
one or multiple items change
3. Different methods of accounting - cash-based vs. accrual, and determining when
revenue and expenses are recognized
4. When to expense something and when to capitalize it. Not all expenses are
created equal
5. What individual items on the statements, like Goodwill, Other Intangibles and
Shareholders' Equity, actually mean.
1. 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 of the statement.
,The Balance Sheet shows the company's assets - its resources - such as Cash,
Inventory, PP&E, as well as Liabilities such as Debt and Accounts Payable, and
Shareholder's Equity. Assets must equal Liabilities plus Shareholders' Equity.
Lastly, Cash Flow Statement begins with its 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.
2. Can you give examples of major line items on each of the financial statements?
Income Statement has Revenue; Cost of Goods Sold; SG&A (Selling, General, and
Administrative Expenses); Operating Income; Pretax Income; Net Income
Balance Sheet has Cash; Accounts Receivable; Inventory; Plants, Property, and
Equipment; Account Payable; Accrued Expenses; Debt; Shareholders' Equity
Cash Flow Statement has Net Income; Depreciation & Amortization; Stock-Based
Compensation; Changes in Operating Assets and Liabilities; Cash Flow From
Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of
Securities; Dividend Issued; Cash Flow From Financing
3. 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
of the cash flow statement.
4. 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?
It would be the Cash Flow Statement. It's because the Cash Flow Statement shows
the overall and a true picture of how much cash the company is actually
generating, independent of all the non-cash expenses you might have. And that is
the #1 thing you care about when analyzing the overall financial health of any
business - its cash flow.
5. 2 statements to access a company's prospects - which 2 would I use and why?
It would be the Income statement and Balance Sheet. Because you can create the
cash flow statement using those two statements (with an assumption that you have
"before" and "after" versions of the Balance sheet that correspond to the same
period the Income Statement is tracking).
6. Walk me through how Depreciation going up by $10 would affect the statements
, Income Statement Operating Income would go down by $10, and assuming the
income tax is 40%, the net income would decline by $6.
Cash Flow Statement now starts with the net income that is $6 lower than before.
However, since depreciation $10 is non-cash expense, it would be added back;
therefore, the overall net cash would be up by $4.
Lastly, Balance Sheet's asset - PP&E - is down by $10 however the Cash is up by
$4 due to the Cash Flow Statement.
Overall, Assets is down by $6. Since Net Income fell by $6, Shareholders' Equity
on the Liabilities & Shareholders' Equity side is down by $6 and both sides of the
Balance Sheet balance.
Always, go with Income statement -> Cash Flow Statement -> Balance Sheet
*Asset going up decreases Cash Flow, whereas a Liabilities going up increases
your Cash Flow*
7. If Depreciation is a non-cash expense, why does it affect the cash balance?
Although Depreciation is non-cash expense, it is tax-deductible. Since taxes are a
cash expense, Depreciation affects cash by reducing the amount of taxes you pay.
