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Accounting Questions and Answers: Mastering Financial Statements, Exams of Finance

Princeton UniversityFinance

A series of questions and answers related to accounting principles and financial statement analysis. It covers key concepts such as us gaap, the main sections of a 10-k report, the differences between 10-k and 10-q reports, and detailed walkthroughs of the income statement, balance sheet, and cash flow statement. The document also explores the connections between these financial statements and delves into topics like revenue recognition, accrual accounting, and discretionary management decisions that can impact earnings. It serves as a valuable resource for students and professionals seeking to deepen their understanding of financial accounting and analysis. Useful for university students.

Typology: Exams

2024/2025

Available from 07/18/2025

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Wall /
/Street /
/Prep /
/Red /
/Book /
/Accounting //Questions //With //Correct //Answers
What //is //the //primary //purpose //of //US //GAAP? //- //verified //answer(s)-
✔✔SEC /
/authorizes /
/the /
/FASB /
/to /
/determine /
/the /
/accounting /
/rules. //Under //FASB, //financial //statements //are //required //to //be //prepared //in //accordance //with
//US //GAAP.
What //are //the //main //sections //of //a //10-K? //- //verified //answer(s)-✔✔In //a //10-
K, /
/you'll /
/find /
/the /
/three /
/core /
/financial /
/statements, //which //are //the //income //statement, //cash //flow //statement, //and //balance //sheet. //
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Wall /

/Street /

/Prep /

/Red /

/Book /

/Accounting //Questions //With //Correct //Answers

What //is //the //primary //purpose //of //US //GAAP? //- //verified //answer(s)-

✔✔ SEC /

/authorizes /

/the /

/FASB /

/to /

/determine /

/the /

/accounting /

/rules. //Under //FASB, //financial //statements //are //required //to //be //prepared //in //accordance //with

//US //GAAP.

What //are //the //main //sections //of //a //10-K? //- //verified //answer(s)- ✔✔ In //a //10-

K, /

/you'll /

/find /

/the /

/three /

/core /

/financial /

/statements, //which //are //the //income //statement, //cash //flow //statement, //and //balance //sheet. //

There'll /

/also /

/be //

a /

/statement /

/of //shareholders' //equity, //a //statement //of //comprehensive //income, //and //supplementary //data

//and //disclosures //to //accompany //the //financials.

What //is //the //difference //between //the //10-K //and //10-Q? //- //verified //answer(s)- ✔✔ 10-K //-

> //Annual //report

10-Q //-> //Quarterly

Additional //Differences: //

10-Ks //need //an //independent //auditor. //

10-Qs //are //only //reviewed //by //CPAs. //

10-Ks //within //60-90 //days //after //the //fiscal //year //ends. //

10-Qs //within //40-45 //days //after //quarter //ends

Walk //me //through //the //three //financial //statements. //- //verified //answer(s)-

✔✔ 1. //Income //Statement //("IS"): //

The /

/income /

/statement /

/shows //

a /

/company's /

/profitability /

/over //

a /

/specified /

/period. /

/The /

/beginning /

/line /

/context //on //what //assets, //liabilities, //and //equity //each //represent? //- //verified //answer(s)-

✔✔ Assets: //Resources //that //can //be //sold //for //money //or //creative //positive //monetary //benefit.

//Future //inflows.

Liabilities: //Unsettled //obligations //to //another //party //in //the //future. //Future //outflows.

Equity: /

/Capital /

/invested /

/in /

/the /

/business /

/and /

/represents //the //internal //sources //of //capital //that //helped //fund //the //assets. //RE //is //here //too.

What /

/are //the //typical //line //items //you //might //find //on //a //balance //sheet? //- //verified //answer(s)- ✔✔

Walk //me //through //the //cash //flow //statement? //- //verified //answer(s)-

✔✔ There //are //two //methods: //Direct //and //Indirect. //

Indirect:

1. //CFO: //Starts //with //net //income //and //adds //back //non-

cash /

/expenses /

/such /

/as /

/depreciation //

/amortization /

/and /

/stock //based //compensation, //and //then //makes //adjustments //for //changes //in //working //capital.

/CFI: /

/Accounts /

/for /

/capital /

/expenditures /

/(typically //the //largest //outflow), //followed //by //any //business //acquisitions //or //divestitures. //

/CFF: /

/Shows /

/the /

/net /

/cash /

/impact /

/of /

/raising /

/capital /

/from /

/issuances /

/of /

/equity /

/or /

/debt, /

/net /

/of /

/cash /

/used /

/for /

/share /

/repurchases, /

/and /

/repayments /

/of /

Interest /

/expense /

/on //the //IS //is //also //calculated //off //the //beginning //and //ending //debt //balances //on //the //BS. //

PP&E //on //the //BS //is //reduced //by //depreciation.

If /

/you /

/had //

a //BS //and //must //choose //between //IS //and //CFS //which //would //you //pick? //- //verified //answer(s)-

✔✔ IS //because //you //can //reconcile //CFS //using //the //BS's //y/y //changes //along //with //IS.

Which //is //more //important, //IS //or //the //CFS? //- //verified //answer(s)-

✔✔ Both /

/are /

/necessary; /

/CFS /

/could /

/be /

/argued /

/since //it //reconciles //net //income //and //can //explain //what //exactly //is //occurring //to //cash. //

Liquidity-

related //issues //and //investment/financing //activities //that //do //not //appear //on //an //accrual-

based //IS.

If /

/you /

/had /

/to /

/pick /

/between //either //the //IS //and //CFS //to //analyze //a //company, //which //would //you //pick? //- //verified

//answer(s)- ✔✔ CFS //because:

1) //Honest //depiction //of //liquidity

2) //Not //prone //to //as //much //discretionary //influence //as //IS.

Caveat: /

/IS /

/could /

/be /

/used /

/to /

/value //

a /

/company /

/based /

/on /

/multiple /

/revenue /

/streams. //CFS //is //less //helpful //for //valuations //when //CFO, //NI, //and //FCF //are //all //negative.

Why /

/is /

/the /

/income /

/statement //insufficient //to //assess //the //liquidity //of //a //company? //- //verified //answer(s)-

✔✔ - //Cannot //tell //DSO //or //credit //collection

  • //Under //accrual //accounting //can //be //impacted //by //management //discretion //
  • //CFO //is //the //solution //to //these //problems

What /

/are /

/some /

How //does //accrual //accounting //differ //from //cash-basis //accounting? //- //verified //answer(s)-

✔✔ Accrual /

/Accounting: /

/Revrec /

/is /

/based /

/on /

/when /

/it /

/is /

/earned, /

/and //the //expenses //associated //with //that //revenue //are //incurred //in //the //same //period.

Cash-

Basis /

/Accounting: /

/Revenues /

/and /

/expenses /

/are /

/recognized /

/once //cash //is //received //or //spent, //regardless //of //delivery //status //with //the //customer.

What //is //the //difference //between //COGS //and //Operating //Expenses? //- //verified //answer(s)-

✔✔ COGS: /

/Direct //costs //associated //with //the //production //of //goods //sold //or //the //delivery //of //services //to

//generate //revenue //(direct //material //and //labor //costs).

Operating /

/Expenses: /

/SG&A /

/and /

/R&D /

/are /

/not /

/directly /

/associated /

/with /

/the //production //of //goods //and //services. //Examples //include //rent, //payroll, //wages, //marketing,

//and //advertising //expenses.

When /

/do //you //capitalize //vs. //expense //items //under //accrual //accounting? //- //verified //answer(s)-

✔✔ Capitalized: /

/Over //a //year //of //expected //benefit //must //be //capitalized //and //expensed //over //its //useful //life. //

Expensed: //Benefits //received //are //short-

term //and //should //be //incurred //during //the //same //period.

If //deprecation //is //a //non-

cash //expense, //how //does //it //affect //net //income? //- //verified //answer(s)-

✔✔ Depreciation //is //treated //as //a //non-

cash //expense //added //back //to //the //CFS. //The //expense //is //tax-

deductible //and //reduces //tax //burden. //

The /

/actual /

/cash /

/outflow /

/for //the //initial //PP&E //has //already //occurred, //so //the //annual //depreciation //is //the //non-

cash //allocation //of //the //initial //outflow //at //purchase.

Do //companies //prefer //straight-line //or //accelerated //depreciation? //- //verified //answer(s)-

✔✔ Most //companies //prefer //straight-

line /

/deprecation /

/for /

/GAAP /

/accumulated /

/depreciation. /

/Today, /

/the /

/PP&E /

/has //

a /

/fair /

/market /

/value /

/of /

/$20M. /

/Under /

/GAAP, //what //is //the //value //of //that //PP&E //on //the //balance //sheet? //- //verified //answer(s)-

✔✔ $2M. /

/Except /

/for /

/certain /

/liquid /

/financial /

/assets /

/that /

/can /

/be /

/written /

/up /

/to /

/reflect //their //FMV, //companies //must //carry //the //value //of //their //assets //at //their //net //historical

//costs. //

Under /

/IFRS, /

/the //revaluation //of //PP&E //to //fair //value //is //permitted. //Although //it //is //not //widely //known.

What //is //the //difference //between //growth //and //maintenance //capex? //- //verified //answer(s)-

✔✔ Growth /

/Capex: //Discretionary //spending //to //expand //customer //base //and //revenue //per //customer.

Maintenance /

/Capex: /

/Required //expenditures //for //the //business //to //continue //operating //in //its //current //state.

Which //types //of //intangible //assets //are //amortized? //- //verified //answer(s)-

✔✔ Amortization /

/is /

/depreciation /

/but /

/for /

/intangible /

/assets. /

/Examples /

/include /

/customer /

/lists, /

/patents, /

/copyrights, /

/and /

/trademarks. //They //all //have //a //finite //life //and //are //thus //amortized //over //their //useful //life.

What //is //goodwill //and //how //is //it //created? //- //verified //answer(s)-

✔✔ Represents /

/an /

/intangible /

/asset /

/that /

/captures /

/the /

/excess /

/of /

What /

/is //the //"going //concern" //assumption //used //in //accrual //accounting? //- //verified //answer(s)-

✔✔ Companies /

/are /

/assumed /

/to /

/continue /

/operating /

/into //the //future //and //remain //in //existence //indefinitely. //Cash //flow //generation //continues.

Explain /

/the /

/reasoning /

/behind //the //principle //of //conservatism //in //accrual //accounting? //- //verified //answer(s)-

✔✔ Downward /

/measurement /

/bias //in //accounting //estimates. //Belief //that //it //is //better //to //understand //than //overstate.

Risk /

/of //

a /

/company's /

/assets /

/or /

/asset /

/values //being //overstated //and //expenses //or //liabilities //being //understated //is //minimized.

Why /

/are /

/most /

/assets //recorded //at //their //historical //cost //under //accrual //accounting? //- //verified //answer(s)-

✔✔ Historical /

/cost /

/principle: /

/an /

/asset's /

/value /

/on /

/the /

/BS /

/must /

/reflect /

/the /

/initial /

/purchase /

/price, /

/not /

/the /

/current /

/market /

/price. /

/This /

/is /

/the /

/most /

/consistent /

/measurement /

/since /

/there //is //no //need //for //constant //revaluations //and //markets, //reducing //market //volatility.

Why /

/are /

/the /

/values /

/of //

a //company's //intangible //assets //not //reflected //on //its //balance //sheet? //- //verified //answer(s)-

✔✔ Internally /

/developed /

/intangible /

/assets //have //no //value //as //they //cannot //be //accurately //quantified //and //recorded //(huge //bias).

/begins /

/with //net //income //and //NI //captures //all //of //a //company's //revenue, //an //increase //in //AR //means

//that //more //customers //paid //on //credit //during //the //period.

Thus //a //downwards //adjustment //to //NI //must //occur //to //arrive //at //the //ending //cash //balance.

What //is //deferred //revenue? //- //verified //answer(s)-

✔✔ Liability //that //represents //payments //received //but //not //yet //earned. //

Customer //has //paid //company, //but //company //has //not //yet //delivered //the //product.

Why /

/are /

/increases //in //accounts //payable //shown //as //an //increase //in //cash //flow? //- //verified //answer(s)-

✔✔ This /

/would /

/mean /

/the //company //is //delaying //payments, //and //the //cash //is //still //in //the //company's //possession.

Which //section //of //the //CFS //captures //interest //expense? //- //verified //answer(s)-

✔✔ CFS /

/does /

/not /

/directly /

/capture /

/interest /

/expense. /

/However, /

/interest /

/expense /

/is /

/recognized /

/on //the //IS //and //then //gets //indirectly //captured //in //the //CFO //since //NI //is //the //starting //line.

What /

/happens /

/to /

/the //three //financial //statements //if //a //company //initiates //a //dividend? //- //verified //answer(s)-

✔✔ IS: //No //changes //to //the //IS. //DPS //below //NI //could //show.

CFS: //CFF //will //decrease //by //the //dividend //payout //and //lower //the //ending //cash //balance.

BS: /

/Cash /

/balance //will //decline //by //dividend //amount, //balanced //by //decrease //in //retained //earnings.

Do //inventories //get //captured //on //the //IS? //- //verified //answer(s)-

✔✔ No. //Gets //partially //indirectly //captures //in //COGS.

How //should //an //increase //in //inventory //get //handled //on //the //CFS? //- //verified //answer(s)-

✔✔ Increase //in //inventory //reflects //a //use //of //cash //(outflow).

What /

/is //the //difference //between //LIFO //and //FIFO, //and //what //are //the //implications //on //Net //Income

//- //verified //answer(s)- ✔✔

How //do //you //calculate //retained //earnings //for //the //current //period? //- //verified //answer(s)-

✔✔ Current //RE //= //Prior //RE //+ //NI //- //Dividends

What /

/does /

/the /

/retention /