Now we go beyond basics → how exam questions are actually asked
📊 Balance Sheet
Equation (core)
👉 Assets = Liabilities + Equity
Types of Assets (VERY IMPORTANT)
✅ Current Assets (Short-term)
- Cash
- Inventory
- Receivables
👉 Used within 1 year
✅ Non-Current Assets (Long-term)
- Land
- Machinery
- Buildings
Types of Liabilities
✅ Current Liabilities
- Short-term loans
- Payables
✅ Non-Current Liabilities
- Long-term debt
⚠️ Exam Trap
👉 High current assets ≠ always good
Example:
Too much inventory = slow sales ❌
📈 Profit & Loss Statement
Structure (VERY IMPORTANT)
- Revenue
- Cost of Goods Sold (COGS)
- Gross Profit
- Operating Expenses
- Operating Profit (EBIT)
- Interest
- Tax
- Net Profit
Key Concept
👉 EBIT (Earnings Before Interest & Tax)
- Shows core business performance
👉 Net Profit
- Final profit after everything
⚠️ Exam Trap
👉 Company can:
- Have high revenue
- BUT low profit ❗
→ Means high expenses
📈 Cash Flow Statement
3 Sections
✅ Operating Activities (MOST IMPORTANT)
- Cash from core business
👉 Positive = good sign 👍
✅ Investing Activities
- Buying/selling assets
👉 Negative can be GOOD
(because company is investing)
✅ Financing Activities
- Loans, dividends, equity
⚠️ BIG EXAM TRAP
👉 Situation:
| Profit | Cash Flow |
|---|---|
| High | Negative |
👉 Meaning:
- Company is not actually generating cash ❌
🔥 Link Between All 3 Statements
👉 This is asked indirectly in exam
🔄 Flow:
- P&L → gives Net Profit
- Net Profit → goes to Balance Sheet (Equity)
- Cash Flow → adjusts actual cash
👉 Simple:
- P&L = performance
- Balance Sheet = position
- Cash Flow = reality
📊 Key Adjustments
1. Depreciation
👉 Meaning:
- Asset value reduces over time
👉 Important:
- Expense in P&L
- BUT no actual cash outflow
2. Working Capital
👉 Formula:
- Working Capital = Current Assets – Current Liabilities
👉 Meaning:
- Day-to-day liquidity
3. Accrual Concept
👉 Revenue recorded even if cash not received
Example:
- Sale done but payment not received
⚠️ Common Exam Traps (VERY IMPORTANT)
- Profit ≠ Cash
- High inventory ≠ good
- High revenue ≠ high profit
- Depreciation ≠ cash outflow
- Negative investing cash flow ≠ bad
🧠 Quick Revision (Advanced)
- EBIT = core profit
- Cash flow > profit importance
- Working capital = liquidity
- All 3 statements are connected
🎯 Exam-Level Questions
Q1. Depreciation is:
a) Cash expense
b) Non-cash expense
c) Liability
d) Asset
Q2. Negative investing cash flow means:
a) Bad company
b) Company investing
c) No cash
d) Loss
Q3. High revenue but low profit means:
a) High margin
b) Low expenses
c) High expenses
d) No sales
Q4. Working capital measures:
a) Profit
b) Liquidity
c) Debt
d) Revenue