#1 Walk me through the 3 financial statements.
The balance sheet displays a company’s assets, its liabilities and shareholders’ equity. The income statement outlines the firm’s revenues and expenses. The cash flow statement shows the cash flows from operating, investing and financing activities.
#2 If I had only one statement and wanted to review the overall health of a company, which statement would I use and why?
Cash is king. The cash flow statement gives a right picture of how much cash the company is generating. That being said, it’s significant to highly that all 3 statements truly are required to get a full picture of the health of a company. Learn more about how the 3 financial statements are linked.
#3 what happens on the income statement if inventory goes up by $10?
Nothing. This is a trick question. The only effect will be on the balance sheet and cash flow statement.
#4 what is working capital?
Working capital is normally defined as current assets less current liabilities. In banking, working capital is usually defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt).
#5 what does having negative working capital mean?
Negative working capital is common in some industries such as grocery retail and the restaurant business. For a grocery store, customers pay upfront, inventory travels relatively quickly but suppliers often given 30 days (or more) credit. This means that the company receives cash from customers before it needs the cash to pay suppliers. Negative working capital is a sign of efficacy in businesses with low inventory and accounts receivable. In other industries, negative working capital might signal a company is facing financial trouble.
#6 if cash collected from customers is not yet recorded as revenue, what happens to it?
It generally goes into “Deferred Revenue” on the balance sheet as a liability if the revenue has not been earned yet.
#7 what’s the difference between deferred revenue and accounts receivable?
Deferred revenue represents cash received customers for services or goods not yet provided. Accounts receivable represents cash owing from customers for goods/services already provided.
#8 When do you capitalize rather than expense a purchase?
If the purchase will be used in the business for more than 1 year, it is capitalized and depreciated.
#9 under what situations does goodwill increase?
When a company purchases another business for more than the fair value of its tangible and intangible assets, goodwill is created.
#10 how do you record PPE and why is this vital?
There are essentially 4 areas to consider when accounting for PP&E on the balance sheet: initial purchase, depreciation, additions (capital expenditures), and dispositions. In adding to these 4, you may also have to consider revaluation. For several businesses, PP&E is the main capital asset that generates revenue, profitability and cash flow.
#11 how does an inventory write-down affect the 3 statements?
On the balance sheet the asset account of Inventory is reduced by the amount of the write-down, and so is shareholders’ equity. The income statement is hit with an expense in either COGS or a separate line item for the sum of the write-down, reducing net income. On the cash flow statement, the write-down is added back to CFO as it’s a non-cash expense but must not be dual counted in the changes of non-cash working capital.
#12 what are 3 examples of common budgeting methods?
Examples of common budgeting techniques include zero-based budgeting, incremental budgeting, and value-based budgeting. Learn more about the many types, in CFI’s budgeting and forecasting course.
#13 please explain the Revenue Recognition and Matching principles?
The revenue recognition principle dictates the procedure and timing of which revenue is noted and recognized an item in the financial statements based on certain conditions (i.e. transfer of ownership). The matching principle dictates that the timing of expenses be matched to the period in which they are incurred, as opposed to when they are really paid.
#14 if you were CFO of our company, what would keep you up at night?
Step back and give a high-level overview of the company’s present financial position, or companies in that industry in over-all. Highlight something on each of the 3 statements. Income statement: growth, margins, viability. Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios. Cash flow statement: short-term and long-term cash flow profile, any need to raise cash or return capital to shareholders.
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The balance sheet displays a company’s assets, its liabilities and shareholders’ equity. The income statement outlines the firm’s revenues and expenses. The cash flow statement shows the cash flows from operating, investing and financing activities.
#2 If I had only one statement and wanted to review the overall health of a company, which statement would I use and why?
Cash is king. The cash flow statement gives a right picture of how much cash the company is generating. That being said, it’s significant to highly that all 3 statements truly are required to get a full picture of the health of a company. Learn more about how the 3 financial statements are linked.
#3 what happens on the income statement if inventory goes up by $10?
Nothing. This is a trick question. The only effect will be on the balance sheet and cash flow statement.
#4 what is working capital?
Working capital is normally defined as current assets less current liabilities. In banking, working capital is usually defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt).
#5 what does having negative working capital mean?
Negative working capital is common in some industries such as grocery retail and the restaurant business. For a grocery store, customers pay upfront, inventory travels relatively quickly but suppliers often given 30 days (or more) credit. This means that the company receives cash from customers before it needs the cash to pay suppliers. Negative working capital is a sign of efficacy in businesses with low inventory and accounts receivable. In other industries, negative working capital might signal a company is facing financial trouble.
#6 if cash collected from customers is not yet recorded as revenue, what happens to it?
It generally goes into “Deferred Revenue” on the balance sheet as a liability if the revenue has not been earned yet.
#7 what’s the difference between deferred revenue and accounts receivable?
Deferred revenue represents cash received customers for services or goods not yet provided. Accounts receivable represents cash owing from customers for goods/services already provided.
#8 When do you capitalize rather than expense a purchase?
If the purchase will be used in the business for more than 1 year, it is capitalized and depreciated.
#9 under what situations does goodwill increase?
When a company purchases another business for more than the fair value of its tangible and intangible assets, goodwill is created.
#10 how do you record PPE and why is this vital?
There are essentially 4 areas to consider when accounting for PP&E on the balance sheet: initial purchase, depreciation, additions (capital expenditures), and dispositions. In adding to these 4, you may also have to consider revaluation. For several businesses, PP&E is the main capital asset that generates revenue, profitability and cash flow.
#11 how does an inventory write-down affect the 3 statements?
On the balance sheet the asset account of Inventory is reduced by the amount of the write-down, and so is shareholders’ equity. The income statement is hit with an expense in either COGS or a separate line item for the sum of the write-down, reducing net income. On the cash flow statement, the write-down is added back to CFO as it’s a non-cash expense but must not be dual counted in the changes of non-cash working capital.
#12 what are 3 examples of common budgeting methods?
Examples of common budgeting techniques include zero-based budgeting, incremental budgeting, and value-based budgeting. Learn more about the many types, in CFI’s budgeting and forecasting course.
#13 please explain the Revenue Recognition and Matching principles?
The revenue recognition principle dictates the procedure and timing of which revenue is noted and recognized an item in the financial statements based on certain conditions (i.e. transfer of ownership). The matching principle dictates that the timing of expenses be matched to the period in which they are incurred, as opposed to when they are really paid.
#14 if you were CFO of our company, what would keep you up at night?
Step back and give a high-level overview of the company’s present financial position, or companies in that industry in over-all. Highlight something on each of the 3 statements. Income statement: growth, margins, viability. Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios. Cash flow statement: short-term and long-term cash flow profile, any need to raise cash or return capital to shareholders.
Read More...
