CHAPTER 3Financial Statements Questions

  1. 1) Walk me through the three financial statements.

    The income statement, the cash flow statement, and the balance sheet are the core financial statements. The income statement is a measure of profitability—revenue less expenses is taxed and creates net income. The cash flow statement tracks how much cash has been spent or generated from three major areas: operating activities, investing activities, and financing activities. The balance sheet is a snapshot of a company's resources (assets), its obligations (liabilities), and equity. The assets must always equal the sum of a company's equity and liabilities.

  2. 2) Walk me through an income statement (more detailed).

    The income statement always starts with revenue, a company's sales, and builds down to net income. Cost of goods sold is the costs most directly associated to the revenue and is reduced from the revenue to produce gross profit (revenue – COGS = gross profit). Operating expenses are the next series of costs and consist of sales, general, and administrative expenses, and marketing and advertising expenses, to name the two most common. Gross profit less operating expenses make EBITDA. Depreciation and amortization are the costs related to the aging of tangible and intangible assets respectively. EBITDA less D&A makes EBIT. Interest expense is reduced from EBIT to get EBT. EBT is then tax affected to get net income.

    You can also add: After net income there are two major sections reserved ...

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