B1 - Reading Business & Financial Information CH1

Questions on Financial Statements

What are the three key financial statements?

Balance Sheet, Income Statement, Cash Flow Statement

What does the balance sheet show?

Assets = Liabilities + Equity at a point in time

What does the income statement show?

Revenues, expenses and profit over a period

What does the statement of cash flows show?

Cash flows from operating, investing and financing activities

Why is the balance sheet a “snapshot”?

It reports balances as of one date, not flows

Define current asset

Asset convertible to cash within 12 months

Define non-current asset

Asset held for less than 12 months

Give three examples of current assets

Cash, receivables, inventory

Give two examples of non-current liabilities

Long-term loans, bonds payable

What is equity?

Owners’ claim = share capital + retained earnings

What are accounts receivable?

Sales made on credit owed by customers

What are accounts payable?

Amounts owed to suppliers for purchases on credit

What is inventory?

Raw materials, Work In Progress, finished goods for sale.

What are prepaid expenses?

Payments for future periods recorded as assets

Define PPE (property, plant & equipment)

Tangible long-lived assets used in operations

What is retained earnings?

Accumulated undistributed profits (or losses)

What is gross profit?

Revenue − Cost of Goods Sold (COGS)

What is EBIT (AKA operating income)?

Revenue − operating expenses before interest & tax

What is EBITDA?

Earnings before interest, tax, depreciation and amortisation

Why add back depreciation when assessing cash?

It’s a non-cash expense so you add back to net income for cash flows

What are operating cash flows?

Cash from core business (receipts − payments)

What are investing cash flows?

Cash for buying or selling long term assets like capex and disposals

What are financing cash flows?

Cash from loans, share issues, dividends, debt repayments

How do notes to financials help?

Provide detail on policies, debt terms, PPE, contingencies

What is an impairment?

A write down when an asset’s recoverable amount is less than its carrying value

Why reconcile cash at period end?

Ending cash on the cash flow statement must equal balance sheet cash

What’s the accounting equation?

Assets = Liabilities + Equity

What’s an extraordinary item?

Rare, non-recurring event reported separately

Why do accountants classify assets/liabilities by current vs non-current?

To assess liquidity and timing of cash flows

One-line advice when reading statements?

Read statements together. Profit shows performance, cash shows liquidity.