Technicals- BIWS Accounting Principles

First 10 questions and most commonly asked

What are the 3 financial statements, and why do we need them?

The 3 major financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement. The Income Statement shows the company’s revenue, expenses, and taxes over a period and ends with Net Income, which represents the company’s after-tax profits. The Balance Sheet shows the company’s Assets – its resources – as well as how it paid for those resources – its Liabilities and Equity – at a specific point in time. Assets must equal Liabilities plus Equity. The Cash Flow Statement begins with Net Income, adjusts for non-cash items and changes in operating assets and liabilities (working capital), and then shows the company’s cash from Investing or Financing activities; the last lines show the net change in cash and the company’s ending cash balance. You need these statements because there is a big difference between a company’s Net Income and the cash it generates – the Income Statement alone doesn’t tell what its cash flow is.

How do the 3 statements link together?

Net Income from the Income Statement becomes the top line of the Cash Flow Statement. Adjust for non-cash items such as Depreciation & Amortization. Reflect changes to operational Balance Sheet items such as Accounts Receivable to get Cash Flow from Operations. Add Investing and Financing activities to reach the net change in cash. Link ending Cash to the Balance Sheet, add Net Income to Retained Earnings, and make sure Assets = Liabilities + Equity.

Depreciation increases by $10. What happens on the 3 statements?

Income Statement: Pre-Tax Income down $10, Net Income down $6 (40% tax). Cash Flow Statement: Net Income down $6, add back $10 depreciation, cash up $4. Balance Sheet: Cash up $4, PP&E down $10, Retained Earnings down $6; both sides balance.

Accounts Receivable increases by $100. What happens on the 3 statements?

Income Statement: Revenue up $100, Net Income up $60 (40% tax). Cash Flow Statement: Net Income up $60, AR increase reduces cash by $100, net cash down $40. Balance Sheet: Cash down $40, AR up $100, Retained Earnings up $60; both sides balance.

Accounts Payable increases by $100. What happens on the 3 statements?

Income Statement: Expense increases, Net Income down $60. Cash Flow Statement: Add back $100 increase in AP, cash up $40. Balance Sheet: Cash up $40, AP up $100, Retained Earnings down $60; both sides balance.

Inventory increases by $100. What happens on the 3 statements?

No change to the Income Statement. On the Cash Flow Statement, cash decreases by $100. On the Balance Sheet, Inventory up $100, Cash down $100.

Company issues $100 of debt to buy equipment. What happens on the 3 statements?

No IS impact initially. On the CFS, CapEx outflow of $100, Debt inflow of $100, net cash change 0. On the BS, PP&E up $100, Debt up $100.

Company buys a factory using debt, then starts operations. Walk me through what happens.

Initially, PP&E and Debt both increase by $100, no IS impact. After one year, record Depreciation and Interest, lowering Net Income; add back Depreciation on the CFS; Cash down from loan repayment; PP&E and Debt fall; Retained Earnings decreases by drop in Net Income.

Company sells a factory worth $100 for $120. What happens on the 3 statements?

Income Statement: Gain of $20 increases Net Income by $12 (40% tax). Cash Flow Statement: Net Income up $12, subtract $20 Gain (non-cash), add $120 proceeds, net cash up $112. Balance Sheet: Cash up $112, PP&E down $100, Retained Earnings up $12; both sides balance.

Company writes down an asset by $100. What happens on the 3 statements?

Income Statement: Pre-Tax Income down $100, Net Income down $60. Cash Flow Statement: Add back $100 non-cash write-down, cash up $40. Balance Sheet: Cash up $40, Asset down $100, Retained Earnings down $60; both sides balance.

What is Working Capital?

The official definition is Current Assets minus Current Liabilities, but the more useful definition is: Working Capital = Current Assets (excluding Cash and Investments) – Current Liabilities (excluding Debt).

What is Free Cash Flow, and what does it mean if it’s positive and increasing?

One simple definition is Cash Flow from Operations minus CapEx. Free Cash Flow represents a company’s discretionary cash flow – how much it has left after funding operations and CapEx. If it’s positive and increasing, the company has flexibility to reinvest, repay debt, or return capital to shareholders.

What happens when Deferred Revenue increases by $100?

Income Statement: No impact initially. Cash Flow Statement: Increase in Deferred Revenue increases cash by $100. Balance Sheet: Cash up $100, Deferred Revenue up $100.

What happens when Prepaid Expenses increase by $100?

Income Statement: No impact yet. Cash Flow Statement: Cash down $100. Balance Sheet: Cash down $100, Prepaid Expenses up $100.

What happens when Stock-Based Compensation is recorded?

Income Statement: Expense increases, lowering Net Income. Cash Flow Statement: Add back SBC since it’s non-cash, so no cash impact. Balance Sheet: Retained Earnings down by Net Income decrease, Common Stock/APIC up by same amount; both sides balance.

What happens when a company pays a dividend?

Income Statement: No impact. Cash Flow Statement: Cash decreases in Financing Activities. Balance Sheet: Cash down, Retained Earnings down; both sides balance.

What happens when a company issues $100 of equity?

Income Statement: No impact. Cash Flow Statement: Cash inflow under Financing Activities +$100. Balance Sheet: Cash up $100, Common Stock/APIC up $100.