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400 Question Guide Pt. 1 - Accounting (Basic), Exams of Advanced Education

University of WitwatersrandAdvanced Education

A comprehensive guide to basic accounting concepts, covering key financial statements, their components, and their interrelationships. It explores common accounting scenarios, such as depreciation, accrued compensation, and inventory changes, and explains their impact on financial statements. The document also delves into working capital, deferred revenue, and the differences between cash-based and accrual accounting. It concludes with a discussion of goodwill and its impairment.

Typology: Exams

2024/2025

Available from 11/10/2024

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400 QUESTION GUIDE PT. 1 - ACCOUNTING
(BASIC)
"Walk me through the three financial statements" - Income Statement: shows the
revenues and expenses of the business and comes down to the net income on the
bottom line
Balance Sheet: shows the business's assets, liabilities and equity. Assets must equal
liabilities plus equity
Cash Flow statement: Begins with net income, adjusts for non-cash expense and shows
business's cash flows from operating, investing and financing activities. Then shows net
changes in cash over the period
"Give examples of major line items on the statements" - Income Statement: revenue,
COGS, SG&A expense, operating income, pretax income, net income
Balance Sheet: cash, accounts receivable, inventory, PP&E, accounts payable, accrued
expenses, debt, shareholders equity
Cash Flow statement: Net income, depreciation and amortization, stock-based
compensation, changes in operating assets and liabilities, cash flow from operations,
CapEx, cash flow from investing, sale/purchase of securities, dividends issued, cash
flow from financing
"How do the statements link" - Net income flows from the bottom of the Income
Statement into retained earnings and on the Balance Sheet and into the top of the Cash
Flow Statement
Changes in the Balance Sheet appear as working capital changes on the cash flow
statement
Investing and financing activities affect PP&E, Debt and Shareholders Equity on the
Balance Sheet
Cash and shareholders equity act like plug-ins with cash changes going from the bottom
of the Cash Flow statement to the Balance Sheet
"If I could only use one statement which would it be?" - Cash Flow Statement: It shows
how much cash the company is taking generating, independent of non-cash expenses,
which is the most important thing in analyzing financial health of a business
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400 QUESTION GUIDE PT. 1 - ACCOUNTING

(BASIC)

"Walk me through the three financial statements" - Income Statement: shows the revenues and expenses of the business and comes down to the net income on the bottom line Balance Sheet: shows the business's assets, liabilities and equity. Assets must equal liabilities plus equity Cash Flow statement: Begins with net income, adjusts for non-cash expense and shows business's cash flows from operating, investing and financing activities. Then shows net changes in cash over the period "Give examples of major line items on the statements" - Income Statement: revenue, COGS, SG&A expense, operating income, pretax income, net income Balance Sheet: cash, accounts receivable, inventory, PP&E, accounts payable, accrued expenses, debt, shareholders equity Cash Flow statement: Net income, depreciation and amortization, stock-based compensation, changes in operating assets and liabilities, cash flow from operations, CapEx, cash flow from investing, sale/purchase of securities, dividends issued, cash flow from financing "How do the statements link" - Net income flows from the bottom of the Income Statement into retained earnings and on the Balance Sheet and into the top of the Cash Flow Statement Changes in the Balance Sheet appear as working capital changes on the cash flow statement Investing and financing activities affect PP&E, Debt and Shareholders Equity on the Balance Sheet Cash and shareholders equity act like plug-ins with cash changes going from the bottom of the Cash Flow statement to the Balance Sheet "If I could only use one statement which would it be?" - Cash Flow Statement: It shows how much cash the company is taking generating, independent of non-cash expenses, which is the most important thing in analyzing financial health of a business

"Which two statements should I pick if I can't have three?" - Income Statement and Balance Sheet: because you could create a cash flow statement based off of those two... as long as you have "before and after" statements from a period of time "How would an increase of $20 in depreciation affect the statements?" - Income Statement:

  • Operating income would go down by *$ -assuming a tax rate of *40%, net income would go down by *$ Cash Flow: -Net income at the top goes down by *$ -Depreciation is a non-cash expense, so it gets added back, making cash flow from operations go up by *$ -So net change in cash goes up by *$ Balance Sheet: -PP&E goes down by *$ -Cash goes up by *$8 because of the changes in the Cash Flow Statement -Net income in retained earning is also reflected here by decreasing by *$ REMEMBER: Assets going up decreases cash flow, Liabilities going up increase cash flow "If depreciation is a non-cash expense, why's it affect cash?" - Depreciation is tax deductible, taxes are a cash expense, so depreciation reduces the amount you pay in taxes "Where does depreciation show up on the income statement?" - Could be a separate line item, or embedded in COSG or Operating Expenses "What happens when accrued compensation goes up by $10?" - Income Statement:
  • Operating expense would go up by *$ -Pre-tax income goes down by *$ -Net income falls by *$6 (assuming 40% tax rate) Cash Flow: -Net income is down by *$ -Cash flow from operations goes up by *$ -Change in cash is up by *$ Balance Sheet: -Cash is up by *$ -Accrued expenses are a liability, so liabilities is up *$ -Retained earnings falls by *$

"What's the difference between accounts receivable and deferred revenue?" - Accounts receivable is from services given, but not yet paid Deferred revenue is from payments that have been given, but services haven't been performed "How long does it take to collect accounts receivable?" - Usually 40-50 days is standard But it can vary based on industry (High end items may take longer) "What's the difference between cash based and accrual accounting?" - Cash based: -Recognizes revenue and expenses when cash is actually received Accrual: -Recognizes revenue and expenses when reasonably expected "How do you decide whether to capitalize rather than expense a purchase?" - If an asset has a useful life of over a year its capitalized, then its depreciated over a certain number of years Short term expenses find themselves on the income statement "Why do companies report both GAAP and Pro Forma earnings?" - Companies have many non-cash charges like; stock based compensation and intangibles that are put into GAAP. Pro Forma excluded many of these and shows a higher earning for companies. "A company has positive EBITDA, but recently went bankrupt. How could this happen???" - There are several possibilities -Too much CapEx spending, which is not reflected in EBITDA -Interest payments are too high -Debt matures on one date, causing a credit crunch -It has sudden one-time charges that cannot be paid off (legal fees, fines) "What is Goodwill?" - Intangible asset created when one company acquires another, for a price greater than its net asset value "Why would goodwill be impaired and what does goodwill impairment mean?" - Happens when goodwill is significantly lower than first thought (company overpaid in acquisition) "Under what circumstances would goodwill increase?" - -Rarely goodwill is reassessed and found to be valued more

-Company gets acquired and goodwill changes as a result -Company buys another and overpays