Investment Banking Flashcards

Questions and Answers

Walk me through the 3 financial statements.

The 3 major financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement.

Which of these are examples of major line items on the Income Statement? (Select all that apply)

Cost of Goods Sold (correct)

Accounts Receivable

Revenue (correct)

Cash

How do the 3 statements link together?

Net Income from the Income Statement flows into Shareholders' Equity on the Balance Sheet and into the Cash Flow Statement.

If I were stranded on a desert island, which financial statement would I use to review the overall health of a company and why?

The Cash Flow Statement. Signup and view all the answers

Which two financial statements would you use to assess a company's prospects and why?

The Income Statement and Balance Sheet. Signup and view all the answers

If Depreciation goes up by $10, how would it affect the Income Statement?

Operating Income would decline by $10. Signup and view all the answers

If Depreciation is a non-cash expense, why does it affect the cash balance?

It is tax-deductible, reducing the amount of taxes paid. Signup and view all the answers

Where does Depreciation usually show up on the Income Statement?

It can be in a separate line item or embedded in Cost of Goods Sold or Operating Expenses. Signup and view all the answers

What happens when Accrued Compensation goes up by $10?

For this question, the answer was not fully provided. Signup and view all the answers

Study Notes

Financial Statements Overview

Three major financial statements: Income Statement, Balance Sheet, Cash Flow Statement.
Income Statement: Displays revenue, expenses, and concludes with Net Income.
Balance Sheet: Captures company assets (cash, inventory, PP&E), liabilities (debt, accounts payable), and shareholders' equity. Assets = Liabilities + Equity.
Cash Flow Statement: Starts with Net Income, adjusts for non-cash expenses and working capital changes, and summarizes cash flows from investing and financing activities.

Major Line Items on Financial Statements

Income Statement: Key items include Revenue, COGS, SG&A, Operating Income, Pretax Income, and Net Income.
Balance Sheet: Relevant items encompass Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued Expenses, Debt, and Shareholders' Equity.
Cash Flow Statement: Major entries include Net Income, Depreciation & Amortization, Stock-Based Compensation, Cash Flows from Operations, Capital Expenditures, and Cash Flows from Investing and Financing.

Linking the Financial Statements

Net Income from the Income Statement flows into Shareholders' Equity on the Balance Sheet and serves as the starting point for the Cash Flow Statement.
Changes in Balance Sheet items related to working capital are reflected on the Cash Flow Statement, while investing and financing activities impact Balance Sheet items.
Cash and Shareholders' Equity act as "plugs" to balance the Balance Sheet.

Assessing Company Health with Financial Statements

If only one statement is available for assessing company health, use the Cash Flow Statement as it reveals actual cash generation.
For a two-statement analysis, choose the Income Statement and Balance Sheet, allowing for the reconstruction of the Cash Flow Statement.

Impact of Depreciation on Financial Statements

An increase in Depreciation by $10 results in a $10 decline in Operating Income and a $6 decrease in Net Income (at a 40% tax rate).
On the Cash Flow Statement, Net Income decreases by $6, but $10 Depreciation (a non-cash expense) is added back, leading to a $4 net increase in Cash Flow from Operations.
On the Balance Sheet, PP&E decreases by $10, Cash increases by $4, resulting in total Assets declining by $6 and Shareholders' Equity reducing by $6, maintaining Balance Sheet equilibrium.

Depreciation's Role as a Non-Cash Expense

Depreciation, though non-cash, impacts cash flow by being tax-deductible, which reduces taxable income and thus taxes owed.

Depreciation Presentation on Income Statement

Depreciation may appear as a separate line item or included in COGS or Operating Expenses, varying by company. It invariably reduces Pre-Tax Income.

Effect of Accrued Compensation Increase

An increase in Accrued Compensation by $10 results in specific impacts across financial statements (details to follow).

Description

Test your knowledge of investment banking with these 400 questions. This quiz covers essential concepts, including financial statements like the Income Statement, Balance Sheet, and Cash Flow Statement. Perfect for students and professionals looking to reinforce their understanding.