Question

What are some accounts in the income statement that can distort the true earning of the company?

How does debt affect the the three cash flow statements? How does debt impact all 3 financial statements?

If you have two companies, one uses FIFO and the other FIFO, which of the two has the most income and which has the most expenses?

How does a convertible bond that turns into equity affect the three financial statements

Answer 1

1.What are the some accounts in the income statements that can distorts the true earnings of the Company?

When you review a company's balance sheet or income statement, you run into a breakdown of cash flow.Companies are fully aware that investors and lenders are monitoring their cash flow statements. Accountants sometimes manipulate cash flow to make it appear higher than it otherwise should.

This is in the cash flow statement, which is presented after the income statement and the balance sheet. Operating cash flow can be distorted in several different ways.

Changing Accounts Payable

Accountants have to determine when to recognize payments made by the company, which are recorded under accounts payable. Suppose a company writes a check and does not deduct that payable amount before the check is actually deposited, allowing the funds to be reported instead in operating cash flow as cash on hand.

Misusing Non-operating Cash

Companies sometimes generate income from operations that are not related to their normal business activity, such as trading in the securities market.

Receivables and Cash Flow

The working capital accounts are most directly responsible for the reporting of cash flow. Receivables increase cash flow, while accounts payable decrease cash flow. A company could artificially inflate its cash flow by accelerating the recognition of funds coming in and delay the recognition of funds leaving until the next period.

Selling Accounts Receivable

Companies might securitize their receivables, which means they sell their outstanding receivables (money that is almost certain to come in but has not yet) to another company for a lump sum, which shortens the length of time that receivables are outstanding. This inflates operating cash flow figures for a short period of time.

2. How does debt affect the three cash flow statements? How does debt impact all three financial statements?

Financing events such as issuing debt affect all three statements in the following way: the interest expense appears on the income statement, the principal amount of debt owed sits on the balance sheet, and the change in the principal amount owed is reflected on the cash from financing section of the cash flow ..

The 3 financial statements are all linked and dependent on each other. In financial modeling, your first job is to link all three statements together in Excel, so it’s critical to understand how they’re connected. This is also a common question for investment banking interviews, FP&A interviews, and equity research interviews. See CFI’s free interview guides to learn more.

In this tutorial, we will break it down for you step-by-step, although we assume you already have a basic understanding of accounting fundamentals and know how to read financial statements.

3. If you have two companies, One uses FIFO and other uses LIFO, Which of the two has the most income and which has the most expense?

For many companies, inventory represents a large, if not the largest, portion of their assets. As a result, inventory is a critical component of the balance sheet. Therefore, it is important that serious investors understand how to assess the inventory line item when comparing companies across industries or in their own portfolios.

• The Last-In, First-Out (LIFO) method assumes that the last unit to arrive in inventory or more recent is sold first.
• The First-In, First-Out (FIFO) method assumes that the oldest unit of inventory is the sold first.
• LIFO is not realistic for many companies because they would not leave their older inventory sitting idle in stock.
• FIFO is the most logical choice since companies typically use their oldest inventory first in the production of their goods.
• 4. How does a convertible bond that turns the equity affect the three financial statements?
• Convertible bonds can affect all three sections of a balance sheet. Asset accounts “cash” and “debt issue costs” reflect proceeds and expenses from issuing a bond. ... Convertible bonds can also affect the equity accounts “common stock” and “paid-in capital in excess of par” if a bondholder converts a bond to stock.
• Public companies issue corporate bonds all the time, but not all bonds are the same. A convertible bond is one that you can convert into shares of stock at your discretion. This means that you'll be able to take advantage when the company's share price increases, as standard bondholders receive only interest payments as creditors of the company while, as a shareholder, you can potentially make a profit off the appreciation. Generally speaking, convertible bonds will increase the amount of debt that appears on a company's balance sheet.