B3 - Reading Business &Financial Information CH3 Income Statement & Statement of Cash Flows

Income Statement & Statement of Cash Flows

Single-step vs multi-step income statement — main difference?

Single: total income vs total expense; Multi: shows gross and operating margins

What is revenue?

Sales or turnover from core operations

COGS = ?

Direct materials + direct labour + direct overhead

Gross profit formula?

Revenue − COGS

Operating expenses include?

Selling, General & Admin + marketing, R&D, rent, legal

What is the purpose of Depreciation & amortisation?

Allocate cost of long-lived assets over useful life

Operating income (EBIT) = ?

Gross profit − operating expenses

Net income = ?

Operating income ± non-operating items − taxes

EBITDA usefulness?

Used as a proxy for operational cash generation (adds back D&A)

Why exclude one-offs when assessing recurring profit?

To measure sustainable operational performance

Profit ≠ cash — why?

Accrual accounting records revenues/expenses before cash moves

How does a sale on credit affect profit and cash?

Increases profit (revenue) now; cash later when Accounts Receivable collected

Cash flow from operations formula (simple version)?

Net income + non-cash expenses − change in Working Capital

Why add depreciation in cash flow from operations?

Non-cash expense; added back to net income

What is investing cash flow?

Cash for PPE purchases, disposals, acquisitions

What is financing cash flow?

Cash from debt/equity issuance, repayments, dividends

Where does proceeds from issuing shares appear?

Financing inflow

Where do loan repayments appear?

Financing outflow (principal); interest in operating or financing per policy

How should sale of an asset be treated?

Investing inflow; any gain/loss affects net income

Why reconcile net income to cash?

To see how accrual profits convert to cash

What signals poor cash quality?

Rising receivable days and falling operating cash vs net income

What is free cash flow (FCF)?

Operating cash flow − net capex

Why track changes in working capital?

They show cash absorbed or released by operations

What is the cash flow “proof” check?

Opening cash + total cash flows = closing cash (matches balance sheet)

How do dividends affect statements?

Financing outflow; reduce cash and retained earnings

What is the role of notes in cash flow analysis?

Explain non-cash transactions, asset disposals, and capex details

How do you treat capitalised costs?

Cash outflow in investing; expensed later via depreciation/amortisation

Why survey operating cash flow trend?

To assess sustainability of earnings and debt service ability

How to spot asset sales used to plug cash holes?

Repeated positive investing cash due to frequent disposals and weak OCF

One-line cashflow advice?

Follow cash, not just profits — cash pays bills and funds growth