Accoun ng Technical Interview Ques ons and Answers

1. Walk me through the Income Statement?

Structure of the Income Statement (Top to Bo om):

1. Revenue / Sales

 The total income from selling goods or services.

 Example: ₹10,00,000

2. Cost of Goods Sold (COGS)

 Direct costs related to produc on or delivery.

 Includes raw materials, labour directly involved in making goods.

 Example: ₹4,00,000

3. Gross Profit

 Formula: Revenue − COGS

 Shows how efficiently the company produces.

 Example: ₹10,00,000 − ₹4,00,000 = ₹6,00,000

4. Opera ng Expenses

These are indirect costs incurred in running the business:

 Selling Expenses: Adver sing, sales commissions

 General & Administra ve (G&A): Rent, u li es, salaries (not produc on)

 R&D (if any): Costs to innovate

 Example: ₹2,00,000

5. Opera ng Income (EBIT - Earnings Before Interest and Tax)

 Formula: Gross Profit − Opera ng Expenses

 Measures core business profitability before interest and tax.

 Example: ₹6,00,000 − ₹2,00,000 = ₹4,00,000

 6. Other Income / Expenses

 Gains or losses from investments, interest income, foreign exchange, etc.

 Example: Interest Income = ₹10,000, Loss on Sale of Asset = ₹5,000

7. Earnings Before Tax (EBT)

 Formula: Opera ng Income ± Other Income/Expenses

 Example: ₹4,00,000 + ₹5,000 = ₹4,05,000

8. Income Tax Expense

 Tax on pre-tax income.

 Example: ₹1,00,000

9. Net Income / Net Profit

 Formula: EBT − Taxes

 Final profit a er all expenses and taxes.

 Example: ₹4,05,000 − ₹1,00,000 = ₹3,05,000

Bo om Line: Net Income

 This is what goes to retained earnings or shareholders (as dividends).

 The most important figure to judge profitability.

Summary of Income Statement:

Revenue
- COGS
= Gross Profit
- Operating Expenses
= Operating Income (EBIT)
± Other Income / Expenses
= Earnings Before Tax
- Income Tax
= NET INCOME
2. Walk me through the Balance Sheet?

Balance Sheet Overview

The Balance Sheet provides a snapshot of a company’s financial posi on at a specific point in me. It shows what the
company owns (assets), owes (liabili es), and the owner’s/shareholders’ equity.

The fundamental accoun ng equa on forms its basis:

Assets = Liabili es + Equity

Structure of a Balance Sheet

1. Assets – What the company owns

A. Current Assets (conver ble to cash within 12 months)

 Cash and Cash Equivalents – Bank balances, pe y cash, treasury bills

 Accounts Receivable – Money owed by customers

 Inventory – Raw materials, work-in-progress, finished goods

 Prepaid Expenses – Rent, insurance paid in advance

 Short-term Investments

B. Non-Current Assets (held for long-term use)

 Property, Plant, and Equipment (PP&E) – Buildings, land, machinery

 Intangible Assets – Patents, trademarks, goodwill

 Long-term Investments

 Deferred Tax Assets

2. Liabili es – What the company owes

A. Current Liabili es (due within 12 months)

 Accounts Payable – Money owed to suppliers

 Short-term Loans

 Accrued Expenses – Salaries, interest, u li es payable

 Unearned Revenue – Payments received before delivering goods/services

 Current Por on of Long-term Debt

B. Non-Current Liabili es (due a er 12 months)

 Long-term Loans and Bonds Payable

 Lease Liabili es

 Deferred Tax Liabili es

 Pension Liabili es

3. Equity – Owner's Claim A er Liabili es

Also known as Shareholders’ Equity or Net Assets

 Common Stock / Share Capital

 Retained Earnings – Accumulated profits not distributed

 Addi onal Paid-in Capital – Over and above face value of shares

 Treasury Stock – Shares bought back by the company (nega ve equity)

 Other Comprehensive Income – Unrealized gains/losses

Summary of Balance Sheet

Assets Liabilities
Current Assets Current Liabilities
Non-Current Assets Non-Current Liabilities
Equity

Key Points

 Always balanced: Assets = Liabili es + Equity

 It reflects the company’s solvency and liquidity.

 Investors and creditors analyse it to assess financial health and creditworthiness.

3. Walk me through the Cash Flow Statement?

1. Cash Flows from Opera ng Ac vi es (CFO)

This sec on shows cash generated or used in the company’s core business opera ons.

Includes:

 Cash inflows: from customers for sales

 Cash ou lows: to suppliers, employees, taxes, interest

Adjustments (Indirect Method):

 Start with Net Income

 Add: Non-cash expenses (e.g., Deprecia on, Amor za on)

 Adjust for: Changes in working capital (e.g., increase/decrease in receivables, payables, inventory)

This sec on reflects how well the company’s daily opera ons are genera ng cash.

2. Cash Flows from Inves ng Ac vi es (CFI)

This sec on shows cash related to the purchase and sale of long-term assets and investments.

Includes:

 Cash ou lows: Purchase of fixed assets (PP&E), investments

 Cash inflows: Sale of assets, sale of investments

This reflects how much the company is inves ng in its future opera ons.

3. Cash Flows from Financing Ac vi es (CFF)

This sec on shows cash flows related to raising and repaying capital.

Includes:

 Cash inflows: Issuing shares, taking loans

 Cash ou lows: Repaying loans, paying dividends, share buybacks

This reveals how the company finances its opera ons and growth (debt vs. equity).
 Final Sec on: Net Increase (or decrease) in Cash

 Sum of CFO + CFI + CFF

 Add to Opening Cash Balance (beginning of the period)

 Gives the Ending Cash Balance

Example Summary:

Ac vity Cash Flow (₹)

Opera ng Ac vi es +50,000

Inves ng Ac vi es -20,000

Financing Ac vi es +10,000

Net Cash Flow +40,000

Opening Cash: ₹10,000

Ending Cash: ₹50,000

Key Takeaways:

 Posi ve Opera ng Cash Flow is a good sign of business health.

 Nega ve Inves ng Cash Flow o en means the company is growing.

 Financing Cash Flow helps understand capital structure decisions.

4. How are the 3 Financial Statements are connected?

1. Net Income connects all three

 Starts in Income Statement:

Net Income is the bo om line of the Income Statement.

 Flows into Balance Sheet (Equity):

Net Income increases Retained Earnings under Shareholders' Equity on the Balance Sheet.

 Flows into Cash Flow Statement:

Net Income is the star ng point of the Cash Flows from Opera ng Ac vi es in the Cash Flow Statement (under
indirect method).

2. Deprecia on and Non-Cash Expenses

 Shown as expenses in the Income Statement.

 Added back to Net Income in the Cash Flow Statement (because they are non-cash).

 Also reduce the value of Fixed Assets in the Balance Sheet.

3. Changes in Working Capital (CA & CL)

 Current Assets (like Inventory, Accounts Receivable) and Current Liabili es (like Accounts Payable) are on the
Balance Sheet.

 Their changes are reflected in the Cash Flow from Opera ng Ac vi es.

4. Inves ng and Financing Ac vi es

 Capital expenditures (CapEx) reduce cash in the Cash Flow Statement and increase Fixed Assets in the Balance
Sheet.

 Issuance or repayment of debt or equity affects:

o Cash Flow from Financing Ac vi es

o Liabili es or Equity on the Balance Sheet

5. Ending Cash Balance

 The ending cash from the Cash Flow Statement is shown in the Balance Sheet under Cash and Cash Equivalents.
 Summary Flow:

Income Statement → Net Income →

(1) Balance Sheet (Retained Earnings)

(2) Cash Flow Statement (Opera ng Ac vi es)

Cash Flow Statement → Ending Cash →

Balance Sheet (Cash)

Balance Sheet changes (Assets/Liabili es) →

Cash Flow Statement (Working Capital, CapEx, Financing)

5. Would you like an image of a Balance Sheet layout or a comparison with other financial statements like the Income
Statement or Cash Flow Statement?

If you want to understand the Balance Sheet structure, go for:

Image of a Balance Sheet layout

This helps you visualize:

 Assets (Current & Non-Current)

 Liabili es (Current & Long-Term)

 Equity (Share Capital, Retained Earnings)

 How the equa on Assets = Liabili es + Equity is structured

Best for beginners or visual learners.

If you want to understand how the Balance Sheet fits into the big picture, go for:

Comparison with other financial statements

This helps you learn:

 Balance Sheet shows financial posi on at a point in me

 Income Statement shows profitability over a period

 Cash Flow Statement shows cash movement (opera ng, inves ng, financing)

Best for intermediate learners or interview prep.

6. If you have a balance sheet and must choose between the income statement or the cash flow statement, which would
you pick?

Reasons to Choose the Cash Flow Statement:

1. It shows actual cash movement, which the balance sheet and income statement (based on accrual accoun ng) do
not.

2. It helps reconcile net income to cash, giving insight into the company’s real liquidity and financial health.

3. With the balance sheet + cash flow statement, you can infer parts of the income statement (e.g., using changes in
working capital, deprecia on, etc.).

Why Not Just the Income Statement?

 The income statement shows profitability, but not cash.

 Without the cash flow statement, you can't see:

o How much cash was generated from opera ons

o What capital expenditures or debt repayments were funded

o Whether profits translated into real cash

Using Balance Sheet + Cash Flow:

You can es mate net income roughly using:

Cash Flow from Opera ons

+ Deprecia on/Amor za on

± Working Capital Changes

≈ Net Income (adjusted)

Bo om Line:

Cash is king.
If you're analysing a company’s financial health, especially its ability to survive, grow, or pay obliga ons, cash flow ma ers
more than reported profit.

Pick the Cash Flow Statement.

7. How would a $10 increase in deprecia on impact all the three statements?

1. Income Statement

 Deprecia on Expense increases by $10, which reduces Net Income.

 Assuming a 30% tax rate:

o Tax Shield = $10 × 30% = $3

o Net Income decreases by $7 ($10 expense - $3 tax savings)

2. Cash Flow Statement

 Start with Net Income (down by $7)

 Then add back non-cash expense (Deprecia on +$10) in Opera ng Ac vi es.

Net effect on Cash Flow = +$3

 Why? Because the $10 deprecia on is non-cash, and the $7 net income drop is reversed by adding back $10.

 So, Cash Flow from Opera ons increases by $3.

3. Balance Sheet

Assets:

 Net PP&E decreases by $10 (due to added deprecia on)

 Cash increases by $3 (from the cash flow statement)

Liabili es:

 No change

Equity:

 Retained Earnings decrease by $7 (from the drop in Net Income)

Balance Sheet balances:

Assets (-$10 PP&E + $3 Cash = -$7) = Liabili es (no change) + Equity (-$7)
 Summary of Impact:

Statement Impact

Income Statement Net Income ↓ $7

Cash Flow Cash from Ops ↑ $3

Balance Sheet PP&E ↓ $10, Cash ↑ $3, Equity ↓ $7

8. Could you give further context on what Revenues and Expenses each represent?

Revenues (also called Sales or Income)

Defini on:
Revenues represent the amount of money a business earns from its normal business ac vi es, such as selling goods or
providing services.

Purpose:
Revenues are the top line of the income statement. They show how effec vely a company is genera ng income from its core
opera ons.

Examples:

 A retailer selling clothes → Sales Revenue

 A consul ng firm charging clients → Service Revenue

 A SaaS company receiving subscrip on fees → Subscrip on Revenue

 A company earning interest on investments → Interest Income (non-opera ng revenue)

Key Points:

 Reported before deduc ng any costs or expenses

 Can be broken down into Opera ng Revenue (from core ac vi es) and Non-Opera ng Revenue (from secondary
sources)

Expenses

Defini on:
Expenses are the costs incurred by a business to earn revenues and operate effec vely. These are the ou lows or using up
of assets as part of opera ons.

Purpose:
Expenses are deducted from revenues to determine net income or net loss in a given period.

Examples:

 Cost of Goods Sold (COGS): Cost to produce or purchase the goods sold

 Salaries and Wages: Paid to employees

 Rent Expense: For office or factory space

 U li es Expense: Electricity, water, etc.

 Deprecia on: Gradual write-off of asset costs

 Interest Expense: Cost of borrowed funds

 Tax Expense: Income taxes payable to the government

Categories:

 Opera ng Expenses: Related to core opera ons (e.g., salaries, rent, u li es)

 Non-Opera ng Expenses: Not related to main opera ons (e.g., interest expense)

 Fixed vs. Variable Expenses: Fixed remain constant (e.g., rent); variable change with ac vity (e.g., commissions)

Summary Table:

Component Revenue Expense

What it is Earnings from business ac vity Costs to run the business

Financial Statement Appears at the top of Income Statement Deducted below revenue in Income Statement

Goal To maximize To control/minimize

Effect on Net Income Increases it Decreases it

9. Could you give further context on what Assets, Liabili es and Equity each represent?

Assets

What they represent:

Assets are resources owned or controlled by a business that are expected to bring future economic benefits.

Examples:

 Current Assets (conver ble to cash within 1 year):

o Cash and cash equivalents

o Accounts receivable

o Inventory

o Prepaid expenses

 Non-Current Assets (long-term use):

o Property, Plant, and Equipment (PPE)

o Intangible assets (e.g., patents, goodwill)

o Long-term investments

Think of assets as what the company owns or uses to generate revenue.

Liabili es

What they represent:

Liabili es are obliga ons or debts that the business owes to outside par es, to be se led over me through the transfer of
assets (usually cash) or services.

Examples:

 Current Liabili es (due within 1 year):

o Accounts payable

o Accrued expenses

o Short-term loans

o Taxes payable

 Non-Current Liabili es (long-term obliga ons):

o Long-term debt

o Deferred tax liabili es

o Lease obliga ons

Think of liabili es as what the company owes to others.

 Equity (Shareholders' or Owner’s Equity)

What it represents:
Equity is the residual interest in the company’s assets a er deduc ng liabili es. It reflects the owners’ claim on the
business.

Formula:

Equity = Assets − Liabili es

Components:

 Common stock / Share capital

 Retained earnings (accumulated profits not paid out as dividends)

 Addi onal paid-in capital

 Treasury stock (nega ve equity)

Think of equity as the por on of the company that actually belongs to its owners or shareholders.

Example:

Imagine a company has:

 Assets = ₹1,00,00,000

 Liabili es = ₹70,00,000

 Then, Equity = ₹30,00,000

Summary Table:

Category Represents Examples

Assets Resources the company owns Cash, inventory, machinery, buildings

Liabili es Obliga ons the company owes Loans, accounts payable, accrued expenses

Equity Owners’ stake in the company Capital, retained earnings, reserves

10. What are some of the most common margins used to measure profitability?

1. Gross Profit Margin

 Formula:

 Gross Profit Margin = Revenue−Cost of Goods Sold (COGS) / Revenue * 100

 Purpose: Measures how efficiently a company produces goods or services, before overhead and other expenses.

 High Value = Strong product profitability.

2. Opera ng Profit Margin (EBIT Margin)

 Formula:

 Opera ng Margin = Opera ng Income (EBIT) / Revenue * 100

 Purpose: Shows how well the company controls costs from opera ons (excluding interest and taxes).

 High Value = Efficient opera ons.

3. Net Profit Margin

 Formula:

 Net Profit Margin = Net Income / Revenue * 100

 Purpose: Measures overall profitability a er all expenses (interest, taxes, etc.).

 High Value = Strong bo om-line performance.

4. EBITDA Margin

 Formula:

 EBITDA Margin = EBITDA / Revenue * 100

 Purpose: Reflects cash opera ng profit before non-cash expenses (deprecia on/amor za on).

 Used in: Comparing opera onal profitability across companies and industries.

5. Contribu on Margin

 Formula:

 Contribu on Margin = Revenue−Variable Costs / Revenue * 100

 Purpose: Indicates how much revenue is available to cover fixed costs and profit.

 Used in: Break-even analysis, decision-making on pricing/products.

11. What is Working Capital?

Working Capital is a measure of a company's short-term financial health and its opera onal efficiency. It represents the
difference between a company’s current assets and current liabili es.

Formula:

Working Capital = Current Assets − Current Liabili es

Current Assets may include:

 Cash and cash equivalents

 Accounts receivable

 Inventory

 Prepaid expenses

Current Liabili es may include:

 Accounts payable

 Accrued expenses

 Short-term loans

 Other short-term obliga ons

Example:

If a company has:

 Current Assets = ₹5,00,000

 Current Liabili es = ₹3,00,000

Then:

Working Capital = ₹5,00,000 − ₹3,00,000 = ₹2,00,000

Why It Ma ers:

 Posi ve working capital means the company can pay off its short-term liabili es with its short-term assets — a sign
of good liquidity.

 Nega ve working capital may indicate liquidity problems and poten al difficulty in mee ng short-term obliga ons.

Related Terms:

 Net Working Capital (NWC): Same as Working Capital, though some mes adjusted for non-opera onal items.

 Working Capital Ra o (Current Ra o):

 Current Ra o = Current Assets / Current Liabili es

12. Would you like examples by industry or working capital management ps too?

If you're looking to understand Working Capital be er:

 Examples by Industry will help you see how working capital needs vary.
For example:

o Retail: Needs high inventory, fast-moving receivables.

o Construc on: Long receivables, o en nega ve working capital.

o Tech (SaaS): O en prepaid revenues, less inventory.

If you're focused on improving Working Capital:

 Working Capital Management Tips are more helpful.

For example:

o Op mize inventory turnover.

o Nego ate be er credit terms with vendors.

o Tighten up collec ons on accounts receivable.

13. What is a Bank Reconcilia on Statement and what are the factors affec ng it?

A Bank Reconcilia on Statement (BRS) is a document that compares the cash balance on a company’s books to the
corresponding balance on its bank statement, with the aim of iden fying and reconciling any differences between the two.

It ensures:

 Accuracy in cash records

 Detec on of errors or fraudulent transac ons

 Timely correc on of discrepancies

It is usually prepared at the end of each month or repor ng period.

Purpose of Bank Reconcilia on

 Detect bank errors (e.g., omi ed transac ons, wrong entries)

 Iden fy errors in the company’s books (e.g., duplicate entries, missed transac ons)

 Record bank charges, interest, and direct debits/credits not yet in the books

 Ensure cash balances in books and bank statements match

Common Factors Affec ng Bank Reconcilia on

Factor Descrip on

Outstanding Cheques Cheques issued but not yet cleared by the bank

Deposits in Transit Cash or cheques received and recorded but not yet reflected in the bank

Bank Charges Fees deducted by the bank (e.g., service fees, transac on charges)

Direct Credits Amounts deposited directly into the bank account (e.g., customer payments)

Direct Debits Amounts withdrawn directly (e.g., u lity payments, loan EMIs)

NSF (Non-Sufficient Funds) Cheques Bounced cheques that need to be reversed in books

Errors in Books Mistakes in cash book (e.g., incorrect pos ng, transposi on errors)

Errors by Bank Bank’s mistakes (e.g., wrong amount posted, duplicate transac ons)

Interest Income or Expense Bank interest not yet recorded in company books

Timing Differences Delay between recording in books and reflec on in bank statement
Example Format of a Simple BRS

Par culars Amount

Bank balance as per cash book ₹100,000

Add: Cheques issued but not yet presented ₹20,000

Add: Bank charges not recorded ₹-500

Add: Interest credited by bank ₹1,000

Less: Deposits in transit ₹10,000

Adjusted bank balance ₹110,500

14. What is Accrual Basis Accoun ng?

Accrual Basis Accoun ng is an accoun ng method in which revenues and expenses are recorded when they are earned or
incurred, regardless of when cash is actually received or paid.

Key Features:

1. Revenue Recogni on:

Revenue is recorded when earned, even if payment is received later.
Example: If you provide services in March but get paid in April, revenue is recorded in March.

2. Expense Recogni on:

Expenses are recorded when incurred, even if cash is paid later.
Example: You receive an electricity bill in June but pay in July – the expense is recorded in June.

Examples:

Transac on Accrual Basis Treatment

Service provided in March, paid in April Record revenue in March

Rent for December paid in January Record expense in December

Invoice received in May, paid in June Record expense in May

Advantages:

 Provides a more accurate picture of financial health.

 Matches income with related expenses (matching principle).

 Essen al for GAAP and IFRS compliance.

Disadvantages:

 More complex than cash basis accoun ng.

 Requires adjus ng entries and professional oversight.

 May be confusing for small businesses without accoun ng support.

 Accrual vs Cash Basis:

Feature Accrual Basis Cash Basis

Revenue Recorded When earned When cash is received

Expense Recorded When incurred When cash is paid

Accuracy More accurate Less accurate

Complexity Higher Simpler

15. What is Cash Basis Accoun ng?

Cash Basis Accoun ng is a method of accoun ng in which revenues and expenses are recorded only when cash is actually
received or paid.

Key Features of Cash Basis Accoun ng:

 Revenue Recogni on: Only when cash is received (not when sales are made).

 Expense Recogni on: Only when cash is paid (not when incurred).

 No Accounts Receivable or Accounts Payable: Since everything is based on actual cash flow.

Example:

Let’s say:

 You deliver a service in June but receive payment in July.

 Under cash basis, the revenue is recorded in July, not June.

If you receive an electricity bill in April but pay it in May, the expense is recorded in May.

Advantages:

 Simple and easy to maintain

 Gives a clear picture of actual cash on hand

 Good for small businesses or sole proprietors

Disadvantages:

 Not GAAP compliant (Generally Accepted Accoun ng Principles)

 Doesn’t match income and expenses in the same period (can distort profitability)

 Not suitable for larger or inventory-based businesses

 Compared with Accrual Basis:

Feature Cash Basis Accrual Basis

Revenue recorded When cash is received When earned

Expense recorded When cash is paid When incurred

Complexity Simple More complex

Matching principle No Yes

Used by:

 Small businesses

 Freelancers

 Individuals

 Businesses with no inventory

16. What is Accrued Expenses?

Expenses that are incurred but not yet paid or recorded. It is a Current Liabili es.

Salaries payable at month-end but paid next month.

Debit: Expense

Credit: Accrued Liability

17. What is Accrued Revenues?

Revenues that are earned but not yet received in cash or recorded. It is a Current Assets.

Interest income earned but not yet received.

Debit: Accounts Receivable

Credit: Revenue

18. What is Deferred Expenses or Prepaid Expenses?

Payments made in advance for expenses that relate to a future period. It is a Current Assets.

Paying 12 months’ rent in advance.

Ini ally:

Debit: Prepaid Expense

Credit: Cash

Later (as used/expired):

Debit: Expense

Credit: Prepaid Expense

19. What is Deferred Revenues or Unearned Revenues?

Cash received in advance for goods or services not yet delivered. It is a Current Liabili es.

Customer pays for a 1-year subscrip on upfront.

Ini ally:

Debit: Cash

Credit: Deferred Revenue

Later (as earned):

Debit: Deferred Revenue

Credit: Revenue
20. What is Deprecia on?

Systema c alloca on of the cost of a tangible fixed asset over its useful life. It is an Expense.

Spreading the cost of machinery over 10 years.

Debit: Deprecia on Expense

Credit: Accumulated Deprecia on

21. What is Amor za on?

Systema c alloca on of the cost of an intangible asset over its useful life. It is an Expense.

Amor zing a patent over 5 years.

Debit: Amor za on Expense

Credit: Accumulated Amor za on

22. What is the difference between current and non-current assets?

Answer:

 Current Assets: Expected to be converted to cash within a year (e.g., cash, inventory, accounts receivable).

 Non-Current Assets: Long-term assets (e.g., property, equipment, patents).

23. What happens when a company makes a capital expenditure?

Answer:

 Cash Flow Statement: Cash ou low under inves ng ac vi es.

 Balance Sheet: Increase in PP&E (non-current asset).

 Income Statement: No immediate effect; expense comes via deprecia on over me.

24. What is retained earnings and how is it calculated?

Answer:
Retained Earnings = Prior Retained Earnings + Net Income – Dividends Paid
It’s part of shareholder’s equity.

25. Can a company have posi ve cash flow but be unprofitable?

Answer:
Yes. Due to non-cash expenses like deprecia on or working capital changes, cash flow from opera ons may be posi ve
despite a net loss.
26. A company has rising revenue but declining net income. What could be the reasons?

Answer:

 Increase in cost of goods sold (COGS)

 Higher opera ng expenses (e.g., rent, salaries)

 Increased interest expenses or taxes

 Non-cash charges like impairment or deprecia on

 One- me charges or restructuring costs

27. A company’s net income is posi ve, but cash flow from opera ons is nega ve. Why?

Answer:

 High accounts receivable (slow collec ons)

 High inventory (overproduc on or unsold goods)

 Prepaid expenses increasing

 Non-cash gains infla ng net income

 Deferred revenues declining

28. What happens to financial statements when a company takes out a bank loan?

Answer:

 Balance Sheet: Cash increases (asset), loan increases (liability)

 Cash Flow Statement: Cash inflow under financing ac vi es

 Income Statement: No immediate effect, but interest expense will show in future periods

29. A company purchases machinery. What is the impact?

Answer:

 Cash Flow Statement: Ou low under inves ng ac vi es

 Balance Sheet: Increase in fixed assets (PP&E)

 Income Statement: No immediate impact; deprecia on expense in future periods

30. Inventory increases significantly. What’s the impact?

Answer:

 Balance Sheet: Inventory (asset) increases

 Cash Flow Statement: Opera ng cash flow decreases due to working capital use

 Income Statement: No effect un l inventory is sold

31. How is COGS calculated in manufacturing?

Answer:
COGS = Opening Inventory + Purchases + Direct Labor + Manufacturing Overhead – Closing Inventory

32. What are common non-cash expenses in manufacturing?

Answer:

 Deprecia on on machinery

 Inventory obsolescence

 Amor za on of patents or licenses

33. Where does WIP (Work-In-Progress) appear?

Answer:
Balance Sheet → Inventory → under Current Assets

34. What is deferred revenue in SaaS, and why is it important?

Answer:
Deferred revenue arises when customers pay upfront for so ware subscrip ons. It’s recognized over the life of the service. It
appears as a liability un l earned.

35. Why is EBITDA commonly used in SaaS?

Answer:
Because SaaS companies have high upfront development costs and low marginal costs. EBITDA helps isolate opera onal
profitability from accoun ng deprecia on.
36. What are key metrics in retail income statements?

Answer:

 Gross margin = (Sales – COGS) / Sales

 Same-store sales

 Inventory turnover ra o

37. What happens to the financials if there is shrinkage (inventory loss)?

Answer:

 COGS increases

 Net income decreases

 Inventory (assets) decreases on the balance sheet

38. What’s unique about healthcare financials?

Answer:

 Use of accounts receivable due to insurance claims

 High deprecia on on medical equipment

 Deferred revenue from prepaid services

39. How are bad debts from pa ents treated?

Answer:

 Recorded as bad debt expense on the income statement

 Reduces accounts receivable on the balance sheet

40. What is the impact of a write-down of assets?

Answer:

 Income Statement: Impairment loss recorded → reduces net income

 Balance Sheet: Asset value reduced

 Cash Flow Statement: Added back in opera ng cash flow as it is a non-cash expense
41. What is the effect of issuing equity?

Answer:

 Balance Sheet: Cash (asset) increases, Share Capital/Addi onal Paid-in Capital increases

 Cash Flow Statement: Financing cash inflow

 Income Statement: No immediate effect

41. What is goodwill, and where is it reported?

Answer:
Goodwill is an intangible asset arising when a company acquires another for more than the fair value of its net iden fiable
assets.

 It is reported on the Balance Sheet under Non-Current Assets.

 It is not amor zed but tested annually for impairment.

42. What is the difference between capital expenditure and opera ng expenditure?

Answer:

 Capital Expenditure (CapEx): Long-term investment in assets (e.g., machinery, buildings). Shown in inves ng
ac vi es on the Cash Flow Statement and as PP&E on the Balance Sheet.

 Opera ng Expenditure (OpEx): Day-to-day expenses (e.g., salaries, rent). Reported on the Income Statement as an
expense.

43. What is the impact of accounts receivable increasing?

Answer:

 Balance Sheet: AR (asset) increases

 Cash Flow Statement: Cash from opera ons decreases (because cash is not yet collected)

 No impact on the Income Statement (assuming revenue is already recorded under accrual basis)

44. What is the difference between gross profit, opera ng profit, and net profit?

Answer:

 Gross Profit = Revenue – COGS

 Opera ng Profit (EBIT) = Gross Profit – Opera ng Expenses

 Net Profit = Opera ng Profit – Interest – Taxes + Other Income

45. What is the treatment of dividends in financial statements?

Answer:

 Income Statement: No effect

 Balance Sheet: Reduces Retained Earnings

 Cash Flow Statement: Ou low under Financing Ac vi es

46. How is interest expense shown in financial statements?

Answer:

 Income Statement: Shown a er EBIT (part of financing cost)

 Cash Flow Statement: Part of opera ng cash flow (under U.S. GAAP); financing under IFRS

 Balance Sheet: If unpaid, it appears as interest payable (a liability)

47. What is the purpose of the statement of changes in equity?

Answer:
To show changes in shareholder equity over a period, including:

 Net income

 Dividends paid

 Share issuance or buybacks

 Other comprehensive income

48. How do you analyse a company using financial statements?

Answer:

 Use ra os like current ra o, debt-to-equity, gross margin, ROE, etc.

 Compare trends over me

 Conduct common-size analysis (e.g., each income item as % of revenue)

 Perform cash flow analysis and working capital analysis

49. What is comprehensive income? How is it different from net income?

Answer:

 Net Income: Profit or loss from normal opera ons

 Comprehensive Income: Net Income + Other Comprehensive Income (OCI), which includes items like unrealized
gains/losses on securi es, foreign currency transla on, etc.
Reported in the Statement of Comprehensive Income or as a separate sec on in the income statement.

50. How would a company’s cash flow statement be affected if it writes off a bad debt?

Answer:

 Income Statement: A bad debt expense is recorded, reducing net income.

 Balance Sheet: Accounts receivable decreases; retained earnings decrease via lower net income.

 Cash Flow Statement:

o Under Opera ng Ac vi es, the bad debt is added back to net income because it is a non-cash expense.

o There is no direct cash ou low, as the cash was never received in the first place.

So, while it lowers net income, it does not reduce opera ng cash flow—in fact, it increases it when using the indirect
method.