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    Master this deck with 66 terms through effective study methods.

    Imported from Quizlet

    Created by @katharine

    What are the three core financial statements?

    Income statement, balance sheet, and cash flow statement.

    What does the income statement represent?

    It shows a company's revenues and expenses over a specified time period.

    What is the starting line item of the income statement?

    Revenue (the 'top line').

    What is the ending line item of the income statement?

    Net income (the 'bottom line').

    What does the balance sheet provide?

    A snapshot of a company's financial position at a specific point in time.

    What does the assets side of the balance sheet represent?

    Resources that provide economic utility.

    What does the liabilities and shareholders' equity side of the balance sheet represent?

    Claims against the company's assets.

    What is the fundamental accounting equation?

    Assets = Liabilities + Shareholders' Equity.

    How does the cash flow statement relate to net income?

    Net income is the starting line item in the cash from operations section.

    What adjustments are made to net income in the cash flow statement?

    Adjustments for non-cash expenses like depreciation and amortization.

    What does an increase in net working capital represent?

    An outflow of cash.

    What does a decrease in net working capital represent?

    An inflow of cash.

    How is cash flow from operations calculated?

    Cash Flow from Operations = Net Income + Depreciation and Amortization - Increase in Working Capital.

    How is the cash flow statement linked to the balance sheet?

    It tracks changes in working capital accounts.

    What is capital expenditure (Capex)?

    Cash outflow for the purchase of property, plant, and equipment (PP&E).

    How does Capex affect the balance sheet?

    It increases the PP&E account.

    How does depreciation affect the balance sheet?

    It reduces the recorded value of fixed assets (PP&E).

    What happens when debt is issued?

    It results in a cash inflow and increases liabilities on the balance sheet.

    What happens when dividends are issued?

    It results in a cash outflow and reduces retained earnings on the balance sheet.

    Where does the ending cash balance from the cash flow statement go?

    It flows to the balance sheet as the cash balance for the current period.

    What is the formula for calculating Retained Earnings?

    Retained Earnings = Beginning Balance + Net Income - Dividends

    How do Capital Expenditures (Capex) affect the PP&E balance?

    Capex increases the Ending PP&E Balance.

    What effect does Depreciation have on the PP&E balance?

    Depreciation decreases the Ending PP&E Balance.

    How is the Income Statement linked to the Balance Sheet?

    Through Retained Earnings, which reflects cumulative net earnings minus dividends.

    What happens to the Retained Earnings balance each period?

    It increases by the portion of net income kept by the company and decreases by dividends issued.

    What is the role of Interest Expense in financial statements?

    Interest Expense is recorded on the Income Statement and is calculated from debt balances on the Balance Sheet.

    How does depreciation affect the Income Statement and Balance Sheet?

    Depreciation is a non-cash expense on the Income Statement that reduces the PP&E line item on the Balance Sheet.

    What is the starting line item for the Cash Flow Statement?

    Net Income from the Income Statement.

    What is the significance of non-cash items like Depreciation and Amortization (D&A) in cash flow reconciliation?

    They are added back to net income to reconcile cash flow from operations.

    What does the ending cash balance on the Cash Flow Statement represent?

    The current period cash balance on the Balance Sheet.

    What is the impact of working capital on cash flow?

    Working capital items can either be a source or use of cash, affecting the Cash Flow Statement.

    How does the Cash Flow Statement relate to the Balance Sheet?

    It links through items that impact cash, such as working capital, financing, and PP&E.

    What is the purpose of maintaining consistency across financial statements?

    To ensure accurate reporting and to validate the interconnections between the Income Statement, Balance Sheet, and Cash Flow Statement.

    What is the role of artificial intelligence in financial modeling?

    AI helps validate links between reports and identify discrepancies for improved accuracy and strategic insight.

    What does the term 'double-negative' refer to in financial modeling?

    It refers to subtracting Capex from the PP&E balance when using the negative sign convention, resulting in a positive increase.

    What is the relationship between net income and shareholders' equity?

    Net income flows into the shareholders' equity account via retained earnings.

    What is the significance of the Cash Flow from Operations section?

    It reconciles net income with cash flow by adjusting for non-cash expenses and changes in working capital.

    What is the main challenge in linking financial statements?

    Maintaining consistency across the Income Statement, Balance Sheet, and Cash Flow Statement.

    What is the cumulative profits kept by a company called?

    Retained Earnings.

    What is the effect of dividends on Retained Earnings?

    Dividends decrease the Retained Earnings balance.

    How does the Cash Flow Statement reflect cash-funded stock buybacks?

    Cash-funded stock buybacks are recorded as uses of cash in the Cash Flow Statement.

    What are non-cash items in financial statements?

    Items that do not involve cash transactions, often included in the cash flow statement.

    What is Stock-Based Compensation (SBC)?

    A non-cash expense representing the cost of employee stock options.

    What does an Inventory Write-Down or Write-Off signify?

    A reduction in the value of inventory, reflecting losses or obsolescence.

    What is Goodwill Impairment?

    A reduction in the value of goodwill on the balance sheet, indicating that the asset is worth less than recorded.

    What are Deferred Income Taxes (DTL/DTA)?

    Taxes that are owed or recoverable in future periods due to timing differences in income recognition.

    How is the Change in Net Working Capital (NWC) calculated?

    Beginning NWC - Ending NWC.

    What does a positive Change in NWC indicate?

    An outflow of cash, meaning cash is tied up in working capital.

    What does a negative Change in NWC indicate?

    An inflow of cash, meaning cash is released from working capital.

    How does an increase in Accounts Receivable (A/R) affect cash flow?

    It represents a cash outflow, as cash has not yet been received from customers.

    What is Capital Expenditures (Capex)?

    Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

    How does depreciation relate to Capital Expenditures?

    Depreciation spreads the cost of Capex over the useful life of the asset.

    What is the formula for calculating depreciation?

    (Capital Expenditures - Residual Value) ÷ Useful Life.

    What is Residual Value in the context of depreciation?

    The expected liquidation value of an asset at the end of its useful life.

    What does the Useful Life of an asset refer to?

    The estimated number of years an asset will provide economic utility to the company.

    How is Interest Expense calculated?

    Interest Rate (%) × (Beginning Debt + Ending Debt Balance ÷ 2).

    What does an increase in Long-Term Debt represent?

    A cash inflow from raising capital through debt issuances.

    What is the relationship between Retained Earnings and Net Income?

    Retained Earnings = Prior Period Balance + Net Income - Dividends.

    How do financial statements link together?

    Through the fundamental accounting equation: Total Assets = Total Liabilities + Total Shareholders Equity.

    What does a cash flow statement (CFS) summarize?

    The cash inflows and outflows from operating, investing, and financing activities.

    What is the impact of depreciation on the balance sheet?

    It reduces the value of PP&E on the balance sheet over time.

    What happens to the cash balance after a positive net change in cash?

    It increases the ending cash balance on the balance sheet.

    What is the significance of the matching principle in accounting?

    It ensures that expenses are recognized in the same period as the revenues they help to generate.

    How does an increase in Accounts Payable (A/P) affect cash flow?

    It represents a cash inflow, as the company is delaying cash payments.

    What is the Cash from Investing (CFI) section of the cash flow statement?

    It includes cash transactions for the purchase and sale of physical and financial investments.

    What does the Cash from Financing section of the cash flow statement include?

    It includes cash inflows and outflows related to debt and equity financing.