Scribd
Upload
17 views3 pages

10 07 Walk Through Statements

This document provides an overview of the three financial statements: the income statement, balance sheet, and cash flow statement, which are essential for investment banking interviews. It explains how each statement functions, their key components, and how they interlink, particularly focusing on the flow of net income and cash changes. The document emphasizes the importance of brevity in responses during interviews and offers guidance on handling follow-up questions regarding the connections between the statements.

Uploaded by

zkevin093
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
17 views3 pages

10 07 Walk Through Statements

This document provides an overview of the three financial statements: the income statement, balance sheet, and cash flow statement, which are essential for investment banking interviews. It explains how each statement functions, their key components, and how they interlink, particularly focusing on the flow of net income and cash changes. The document emphasizes the importance of brevity in responses during interviews and offers guidance on handling follow-up questions regarding the connections between the statements.

Uploaded by

zkevin093
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Walking Through the 3 Financial Statements

In this lesson, we are going to go over the most basic accounting question that you might
receive in investment banking interviews, which is to walk through the three financial
statements. If you get this question in an interview, and the interviewer says, “Walk me
through the three financial statements.” Or “tell me about the income statement, balance
sheet, and cash flow statement”, I would say something like the following: “The three financial
statements are the income statement, the balance sheet, and the cash flow statement.”

“The income statement tracks the company's revenue and expenses over a period of time. All
the way at the bottom of the statement, after taking into account everything, you get down to
the company's ‘bottom line’, which is its net income. Net Income represents what the company
makes after paying for all expenses and taxes.”

“The balance sheet provides a snapshot of a company's resources, namely, its assets – which
reflect future benefits – and then how it acquired those resources – that is, its liabilities and
shareholder's equity. The Balance Sheet provides a snapshot of those accounts at a certain
point of time.”

[01:00]

The most important rule with the balance sheet is that assets must equal liabilities plus
shareholder's equity (i.e. A = L + SE), so that both sides are always in balance.

The cash flow statement shows how a company's cash balance changes over time. You start
with the net income. Then, you add back any non-cash charges such as depreciation,
amortization, stock-based compensation, and the like. Then you factor in how items on the
balance sheet have changed, with these items referred to as working capital items, any
investments the company has made, and any financing activities the company has participated
in. Then, at the bottom, once you've taken all those into account, you get to how the
company's cash balance has changed over time. That cash balance number flows into the new
version of the balance sheet, and all the other changes from the cash flow statement are
reflected on that new version of the balance sheet as well.

That's a simple example of how you’d walk through the three statements in the context of an
interview. You’ll notice that I did not go into a whole lot of detail on everything, giving examples
of specific line items or anything like that in the walk-through I just did. Normally, that's fine.

http://breakingintowallstreet.com
[02:00]

If you are not certain, what you want to do is after you finish your explanation, just ask the
interviewer, “Was that enough detail? Or did you want me to go into the specifics on any of the
items, or on any of the statements, or on specific line items that you might actually see?” Just
do that to double-check yourself.

In most cases though, I would say that it's better to just give a few sentences of an overview,
rather than going on for a minute or two minutes or anything long like that. Because generally,
if you go on for longer than 30 or 40 seconds, most interviewers are going to cut you off, unless
it's a really complex question. Keep in mind that brevity is usually a better idea versus trying to
go into detail on every single possible item on the three financial statements here.

If you get a follow-up question on how the statements are actually linked together, and the
interviewer wants more detail on that, what I would say is something like the following: “The
way the statements link together is that on the income statement, the net income – what you
get as the bottom line on the income statement – will flow into the cash flow statement
because it's the top item right there.”

[03:00]

Any other non-cash charges on the income statement are also reflected and added back to the
top of the cash flow statement. Then, any changes in the balance sheet are reflected on the
cash flow statement in changes in operating assets and liabilities. That's how the balance sheet
ties together. Any investments that have increased the asset value on the balance sheet also
show up under investing activities in the cash flow statement. Any changes to the company's
long-term liabilities or their financing, their shareholder's equity on the balance sheet show up
under financing activities on the cash flow statement.

At the end, once you've figured in all those changes, you get to the increase or decrease in
cash. That increase or decrease in cash then flows into the new version of the balance sheet
and becomes your cash balance at the top. The rest of your assets and liabilities have already
changed and have already been reflected on the cash flow statement. There's no need to do
anything there. For shareholder's equity, the only change that you need to make is that you
need to make sure that net income from the income statement is also flowing in there. More
specifically, the Net Income from Income Statement will flow into Retained Earnings, which is
part of Shareholder’s Equity on the Balance Sheet. That's how everything ties together.

http://breakingintowallstreet.com
[04:05]

That's a quick overview of two of the most common interview questions that you might get on
the topic of the three financial statements. Coming up next, we are going to delve into specific
interview questions. We will go through a couple of examples, starting with the very simple
ones involving depreciation and inventory. Then, we will work our way up to more complex
topics and into multi-step scenarios, and how to answer those questions in the context of
interviews.

http://breakingintowallstreet.com

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy