The Statement of Cash Flows shows cash in ows Non-Current Liabilities are obligations due EBIT measures operating

abilities are obligations due EBIT measures operating pro tability before
and out ows categorized by operating, investing, beyond one year (e.g., bonds payable, long-term interest and taxes.
and nancing activities over a speci c period, leases). EBT re ects pro tability after accounting for
providing insights into liquidity. Goodwill arises during acquisitions and represents interest expenses but before taxes.
The Statement of Financial Position (Balance the excess paid over the fair value of identi able Capital Expenditures (CapEx) are investments in
Sheet) re ects the company's nancial standing at a net assets. long-term assets (e.g., equipment, facilities).
speci c point in time, listing assets, liabilities, and Intangible Assets are non-physical assets (e.g.,
equity. Operating Expenses (OpEx) are day-to-day
patents, trademarks) that can be identi ed and expenses to run operations (e.g., salaries, rent).
Current Liabilities and Non-Current Liabilities: amortized over their useful lives.
Current Liabilities are obligations due within one
year (e.g., accounts payable, short-term loans).
Income Statement and Cash Flow Statement 2021, while the Statement of Changes in Equity indication that the expenses are classi ed by
Income Statement: Reports a company’s revenues, explains how this value changed compared to 2020 nature rather than by function.
expenses, and pro ts over a speci c period. It (e.g., pro ts retained, dividends paid).
focuses on pro tability. Tangible Assets vs. Intangible Assets The decrease in inventories could be justi ed by:
Cash Flow Statement: Shows cash in ows and Tangible Assets: Physical items like machinery or
out ows divided into operating, investing, and property. Depreciated over time.
nancing activities over a period. It focuses on Lower Sales Volumes: Reduced production or
liquidity. Intangible Assets: Non-physical items like patents
or goodwill. Amortized or impaired over time. sales during the year, leading to fewer inventory
Current Assets: Resources expected to be needs.
converted to cash or used up within one year (e.g., Inventory Optimization: The company may have
inventory, accounts receivable). Operating Cash Flow vs. Free Cash Flow adopted measures to manage inventory more
Current Liabilities: Obligations due within one Operating Cash Flow: Cash generated from core ef ciently to reduce holding costs.
year (e.g., accounts payable, short-term loans). business activities. Market Conditions: Disruptions caused by
Inventories: Tangible assets held for sale or external factors, such as economic downturns or
Free Cash Flow: Cash remaining after deducting the pandemic (2020).
production (e.g., raw materials, nished goods). capital expenditures from operating cash ow.
Biological Assets: Living plants and animals (e.g.,
livestock, orchards) measured based on fair value. What is being purchased?
ROA: Measures pro tability relative to total Industrial equipment falls under Non-Current
assets. Direct Method: Lists actual cash in ows and Assets because it is used over a long period.
out ows from operating activities, such as:
Formula: How is it paid for?
Collections from customers
Payments to suppliers Immediate payment means cash (or cash
equivalents) decreases.
Payments to employees
Clearly shows speci c cash movements. Where does it impact?
Balance Sheet:
Tangible Fixed Assets increase under Non-Current
ROE:Measures pro tability relative to Indirect Method: Starts with Net Income and Assets.
shareholders’ equity. adjusts for Cash decreases under Current Assets.
- Non-cash items (e.g., depreciation)
- Changes in working capital (e.g., receivables, Cash Flow Statement:
Formula:
payables, inventory The payment is recorded as a cash out ow under
Investing Activities, since equipment purchases
relate to long-term investments.
📌 Total Liabilities = Current Liabilities + Does it affect the Income Statement?
Non-Current Liabilities
No immediate impact because purchasing
🔹 Interpretation of Leverage Ratio (49.7%) equipment is not an expense. It is an investment.
This means 49.7% of the company's assets are In future periods, the cost of the equipment will
nanced by debt, while the remaining 50.3% is appear as depreciation expense over time.
Operating Income: Earnings before interest and nanced by equity.
taxes, derived from core business operations. Purchase of Raw Materials on Credit
Net Income: Pro t after all expenses, taxes,
- A higher leverage ratio (>50%) means the Here, the question asks about the impact of
interest, and other deductions. company relies more on debt, which can be purchasing raw materials on credit.
risky.
Operating Margin: Operating Income / Revenue - A lower leverage ratio (<50%) indicates a What is being purchased?
Measures pro tability after deducting operating more stable capital structure with lower nancial
expenses (e.g., salaries, rent). risk. Raw materials are part of Inventory, which is a
Current Asset on the Balance Sheet.
Includes all costs of running the business except How is it paid for? On credit means no immediate
nancing and taxes. cash payment. Instead, the company incurs a
Example: A company with high marketing or liability.
administrative expenses will have a lower
operating margin. Where does it impact?
Balance Sheet:
Gross Pro t Margin: Formula: Gross Profit/
Revenue Inventory increases under Current Assets.
Accounts Payable increases under Current
Measures the pro tability after deducting cost of Liabilities (since the company owes money to
goods sold (COGS). suppliers).
Focuses on production ef ciency.
Cash Flow Statement:
Eg- A company with high production costs will Turnover: Average Total Assets = There is no immediate cash out ow because the
have a low gross pro t margin. payment has not yet been made.
(Total Assets 2019+ Total Assets2020)/2 The cash out ow will occur in the future when the
company settles the Accounts Payable.
Accounts Receivable:Amounts owed by By Function: Operating expenses are grouped
customers from sales made on credit. Typically due based on their functional purpose within the Does it affect the Income Statement?
within a short period (e.g., 30–90 days).Non- business.
interest-bearing. No immediate impact on the Income Statement
Examples of functional categories: because the raw materials are not yet used.
Notes Receivable:Formal, written promises to pay
a speci c amount on a speci c date.Often involves Cost of Goods Sold (COGS)
interest and may have a longer maturity Once the materials are consumed in production,
period.Example: A loan given to a supplier with a SellingExpenses they will appear as Cost of Goods Sold (COGS).
promissory note. AdministrativeExpenses Key Points to Identify the Correct Answers:
Key Difference: Notes receivable are more formal Distribution Costs Look for immediate cash out ows (affects Cash
and may accrue interest, while accounts receivable Flow Statement) and asset increases (Balance
are simpler trade credits. The expenses are summarized under these Sheet).
Depreciation: Allocates the cost of tangible assets functional headings, without showing detailed No immediate Income Statement impact.
(e.g., machinery, buildings) over their useful lives breakdowns like wages, materials, or utilities.
Recognized as an expense in the Income Question :
Statement. Look for increases in Inventory (asset) and
Example: Depreciating a By Nature: Operating expenses are grouped based Accounts Payable (liability) on the Balance Sheet.
on their economic type or nature. No immediate cash ow effect or Income
manufacturing plant over 20 years. Examples include: Statement impact.
Payroll expenses (e.g., salaries and wages) Cash in ows and cash out ows:
Amortization: Allocates the cost of intangible External supplies and services (e.g., utilities,
assets (e.g., patents, trademarks) over their useful subcontracting)
lives.Recognized as an expense in the Income Cash In ows: These are cash amounts coming
Statement. Example: Amortizing the cost of a Depreciation and amortization
software license over ve years. into the company. Examples include:
Impairment losses
Key Difference: Depreciation applies to physical The speci c line items (e.g., wages, utilities,
assets, while amortization applies to intangible materials) are presented as separate entries. Sales: When customers pay for goods or services.
ones. Loans: Money borrowed from a bank.
Statement of Financial Position: Also known as Analyzing the Provided Income Statement Investments: When investors put money into the
the Balance Sheet. Presents a company's nancial company.
standing at a speci c point in time. Shows Assets, Cash Out ows: These are cash amounts going out
Liabilities, and Equity. Purpose: To provide insight From the Consolidated Income Statement, the of the company. Examples include:
into the company’s solvency, liquidity, and capital expenses are presented as:
structure.
Cost of Sales Paying Suppliers: For goods, raw materials, or
Statement of Changes in Equity: Focuses on the
changes in equity components over a period. External Supplies and Services services.
Includes contributions by shareholders, Payroll Expenses Salaries: Paying employees.
distributions (dividends), and changes in retained Depreciation and Amortization Buying Assets: Such as equipment, vehicles, or
earnings or reserves. Purpose: To explain buildings.
variations in equity between two reporting periods. Impairment Losses De nition: Non-current assets are long-termassets
Example: These are speci c categories of expenses, such as that a company owns and
The Balance Sheet shows total equity at the end of payroll, supplies, and depreciation. This is a clear uses for operations over several years.
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 Explain whether it's bene cial or a risk. Dividend payments to shareholders.
Examples for Continental AG (automotive Signi cant Cash Out ows from Financing Stock buybacks (share repurchases).
industry): Activities Lease payments (if considered nancing).
Interest payments (if classi ed under nancing
Tangible Fixed Assets (Property, Plant & Common nancing out ows: activities).
Equipment - PPE ) → Factories, Machinery 📌 How it's shown:
production equipment, land, and of ce Debt repayment (Loan repayments, bond
buildings (not just apartments, as those are redemption). Large nancing out ows mean a company is
usually investment properties). paying off debt or returning money to investors,
Dividend payments (Cash returned to which can be positive (reducing debt) or negative
shareholders). (cash depletion).
Intangible Assets → Patents, Trademarks,
Goodwill. How to answer: Main sources of nancing a company could be:
How to answer:
Identify the largest non-current asset category from Find the two biggest nancing cash out ows. 1⃣ Equity Financing (Shareholder Investment)
the Balance Sheet. Explain how they impact the company's nancial
Explain its importance in the company's health. Source: Selling company shares to investors
operations. (public or private).
Appears in: Balance Sheet → Shareholders’
Main Sources of Financing Comparability of Financial Statements Equity
Two primary nancing sources: (International Accounting Examples:Common stock issuance (new shares
Standards) sold to investors).
Equity → Money from shareholders (common Retained earnings (pro ts reinvested instead of
stock, retained Are Continental’s nancial statements comparable paying dividends).
earnings). to other German rms? Preferred stock (a hybrid form of equity with
Debt (Liabilities) → Bank loans, bonds, or xed dividends).
leases. Yes, if both follow IFRS (International Financial ✅ Good for: Companies that want to grow
How to answer: Identify the company's main Reporting Standards). without taking on debt.
funding sources.
Discuss the advantages and disadvantages of No, if industry-speci c factors make a big ❌ Downside: Dilutes ownership among
debt vs. equity. difference. shareholders.
Leverage Ratio & Return on Equity (ROE) How to answer:State that IFRS ensures 2⃣ Debt Financing (Loans & Bonds)
Leverage Ratio = Total Liabilities / Total Assets consistency.
Mention possible differences (e.g., industry- Source: Borrowing money that must be repaid
Measures how much of the company's assets are speci c regulations). with interest.
nanced by debt. Appears in: Balance Sheet → Liabilities
A higher ratio means higher nancial risk.
📌 Understand the Three Main Statements: Examples:
Return on Equity (ROE) = Net Income /
Shareholders’ Equity Balance Sheet → Assets, Liabilities, Equity. Bank loans (short-term or long-term).
Shows how ef ciently the company generates Corporate bonds (debt securities sold to
Income Statement → Revenue, Expenses, Pro t. investors).
pro t for investors.
How to answer: Extract the values from the Cash Flow Statement → Operating, Investing, Convertible debt (bonds that can turn into shares).
nancial statements. Financing. ✅ Good for: Companies that want funding
Interpret what a high or low ratio means for the without giving up
company. ownership.
📌 Memorize Key Ratios: ❌ Downside: Increases nancial risk due to
Presentation of Expenses in the Income Statement interest payments.
ROE = Net Income / Equity (Measures
Companies can report expenses: pro tability for
By nature (materials, shareholders). 3⃣ Lease Financing (For Assets Like
salaries, depreciation). Leverage Ratio = Liabilities / Assets (Shows debt Equipment or Property)
By function (cost of level).
sales, R&D, Operating Margin = Operating Pro t / Revenue Source: Instead of buying, companies lease assets
administrative expenses). (Ef ciency of and pay in installments.
operations).
How to answer: Appears in: Balance Sheet → Right-of-Use
Identify which method Continental AG uses in its Assets (for leased property/equipment).
nancials. 📌 How Cash Out ows Appear in a Financial
Explain why the company chose that method. Statement Liabilities → Lease Obligations.
Examples:
Two Most Signi cant Expenses (Income Cash out ows are recorded in the Cash Flow Finance leases (long-term leasing where the
Statement) Statement, which tracks money leaving a company owns the asset at the end).
Common high-cost expenses for automotive company. They are categorized under three Operating leases (short-term rentals, costs
companies: sections: recorded as expenses).
Cost of Materials & Components (Steel, rubber, ✅ Good for: Reducing upfront capital investment
electronic parts). in assets.
1⃣ Operating Activities (Cash Out ows from
Salaries & Labor Costs (Factory workers, Daily Business ❌ Downside: Can create long-term payment
engineers, R&D). Operations) obligations.
How to answer:
Identify the two largest expenses. These are expenses necessary for running the 4⃣ Government Grants & Subsidies
business. Source: Financial aid provided by the government.
Explain their impact on pro tability. Examples: Appears in:
Payments to suppliers for raw materials and Income Statement → Other Income (if recognized
inventory. immediately).
Pro tability Analysis (2022 vs. 2023)Key Metrics
to Compare: Salaries & wages paid to employees. Balance Sheet → Deferred Revenue (if recognized
Net Income (Final Pro t) over time).
Operating Margin (Pro t from core operations) Taxes paid to the government.
Return on Assets (ROA) (Ef ciency of asset use) Examples:
Interest paid on loans (if classi ed under
Possible Reasons for Changes: operating activities). Green energy incentives (for electric vehicle
Higher material costs due to in ation. manufacturers).
Increased sales or operational ef ciency. Utility payments (electricity, rent, of ce supplies). Export subsidies (to support international sales).
Impact of economic downturn or industry demand. Advertising and marketing costs. ✅ Good for: Industries with government support
(e.g., EV, infrastructure).
How to answer: 📌 How it's shown: Cash out ows in operating ❌ Downside: Not a guaranteed or long-term
Compare pro t ratios from 2022 & 2023. activities reduce the company's net cash from funding source.
operating activities.
Explain key changes and external factors. 5⃣ Supplier Credit (Trade Payables)
2⃣ Investing Activities (Cash Out ows from Source: Getting materials and services from
How the Company Reports Cash Flows from Long-Term Investments) suppliers on credit (instead of paying upfront).
Operating Activities
Direct Method → Lists cash received from These involve buying assets or making investments Appears in: Balance Sheet → Current
customers and paid to to expand the company. Liabilities (Accounts Payable).
suppliers. Examples:
Indirect Method → Adjusts net income for non- Example:An automotive company buys steel
cash items. Purchasing new property, plant, and equipment from a supplier and agrees to pay in 90 days.
(PPE) (factories,
How to answer: machinery). ✅ Good for: Managing cash ow without
Check which method Continental AG uses. Acquiring intangible assets (patents, licenses,
software). needing a loan.
Explain why a company might prefer one method Buying investments in other companies ❌ Downside: Can damage supplier
over another. (subsidiaries, nancial relationships if payments are delayed.
securities).
Investing Cash Flow & Its Interpretation Lending money to other entities (if applicable).
6⃣ Customer Prepayments (Deferred Revenue)
Investing Cash Flow (Capital Expenditures) → 📌 How it's shown: Source: Customers pay before the product or
Money spent on Large negative cash ows in this section suggest service is delivered.
factories, machinery, high investment, which may be good if for growth Appears in:
R&D. but bad if assets aren’t generating returns. Balance Sheet → Liabilities (Deferred Revenue)
If negative, is it good or bad? until the product/service is delivered.
3⃣ Financing Activities (Cash Out ows from Debt
Good: If investing in long-term growth (new & Equity Financing) Income Statement → Revenue (once earned).
plants, tech). These involve repaying loans, paying dividends, or Examples:
other nancing costs.
Bad: If investments aren’t generating returns. Examples: Pre-orders for vehicles or software licenses.
Subscription-based business models.
How to answer: Repayment of bank loans or bonds (principal
Identify the investment cash ow. amounts).
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 ✅ Good for: Improving cash ow without Unlike the Income Statement, which Possible explanation:
borrowing. includes non-cash expenses like depreciation, the
❌ Downside: Creates obligations to deliver AutoTech AG might have repaid some loans.
goods/services in the future. Cash Flow Statement only records cash
movements. Interest rates on debt may have dropped.
7⃣ Factoring & Asset-Based Financing
🔹 Cash Out ows in Operating Activities ✅ 4. Increased Ef ciency in Operations
Source: Selling accounts receivable to a third
party (factoring) or borrowing against assets. Payments to Suppliers → For raw materials The company may have optimizedmanufacturing
(COGS-related). processes, logistics, or technology, reducing
Appears in: waste and improving pro ts.
Salaries Paid → For employees.
Balance Sheet → Reduced Accounts Receivable
(for factoring). Taxes Paid → Out ow for corporate tax. Step 3: Summarize the Key Reasons for Pro t
Growth
Liabilities → Secured Loan (for asset-based Interest Payments → If classi ed under operating 1⃣ Higher Sales (+€100M Revenue Growth) →
lending). activities. Increased market
Examples: demand.
🔹 Cash Out ows in Investing Activities
Selling unpaid invoices to a factoring company for 2⃣ Better Cost Management → Costs increased
quick cash. Capital Expenditures (CapEx) → Buying new less than revenue.
machinery, factories.
Using equipment or inventory as collateral for 3⃣ Lower Interest Expenses → Less nancial
loans. Purchasing Intangible Assets → Buying patents,
software licenses. burden.
✅ Good for: Companies needing quick liquidity. Acquiring Subsidiaries → Buying another 4⃣ Improved Operational Ef ciency → More
company. output with controlled
❌ Downside: Costs more due to fees and interest expenses.
rates. 🔹 Cash Out ows in Financing Activities
📌 Final Answer (Short Version for Exam)
📌 1. Expenses in the Income Statement (Affect Repaying Loans & Bonds → Paying back debt
principal. "AutoTech AG's net pro t increased by €30M
Net Pro t)
from 2022 to 2023 due to higher sales (+
The Income Statement shows operating and Dividend Payments → Distributing pro ts to €100M), better cost management (COGS and
non-operating expenses, shareholders. operating expenses increased at a lower rate),
which reduce pro t. lower interest expenses (-€5M), and improved
Stock Buybacks → Company purchasing its own
shares. operational ef ciency. These factors combined
🔹 Operating Expenses (Day-to-Day Business to improve overall pro tability.”
Costs)
📌 Impact: The Cash Flow Statement helps track
✅ These expenses appear before Operating actual cash movement, while the Income Statement
Income (EBIT). includes non-cash expenses.
Cost of Goods Sold (COGS) → Materials, labor, 📌 Common Reasons Why Net Pro t Changes
factory costs. 📌 Summary Table: Where to Find Expenses (These apply to any company in any industry!)
Salaries & Wages → Employee payroll (excluding
management bonuses).
Rent & Utilities → Of ce space, electricity, water, Expense Income Balance Cash Flow 🔹 Net Pro t Increases (Positive Growth)
Type Statement Sheet Statement
maintenance.
Marketing & Advertising → Promotions, social 1⃣ Higher Revenue (Sales Growth)
COGS ❌ No
media, TV ads. (Materials, ✅ Yes (COGS)
✅ Yes (paid to
Depreciation & Amortization → Asset wear and Labor)
(re ected in suppliers) More customers or higher demand for products.
tear (non-cash expense) inventory)
Expansion into new markets or launching new
Salaries & ✅ Yes ❌ No (unless ✅ Yes (actual products.
Research & Development (R&D) → Costs for Wages
innovation, new products. (Operating) unpaid) cash paid)

Selling & Distribution Costs → Transportation, Depreciati

✅ Yes (Non- ✅ Yes Raising prices without losing customers.
on & ❌ No (Non-cash)
shipping, sales commissions. Amortizati Cash) (Reduces
Assets)
on
🔹 Non-Operating Expenses (Financial & Rent & ✅ Yes ❌ No (unless ✅ Yes (actual 2⃣ Lower Cost of Goods Sold (COGS
Unusual Costs) Utilities (Operating) unpaid) payments) Ef ciency)
✅ These appear after Operating Income. Buying materials at lower prices.
Interest ✅ Yes ❌ No (unless ✅ Yes (if
Interest Expense → Cost of debt (loans, bonds). Expense (Financial) unpaid) classi ed under Using more ef cient manufacturing processes.
operating/ Reducing waste or defects in production.
Tax Expenses → Corporate income taxes. Taxes ✅ Yes (Taxes
✅ Yes (Tax ✅ Yes (if actually
(Corporate Payable if
Foreign Exchange Losses → If the company Tax) Expense)
unpaid)
paid) 3⃣ Better Cost Control (Lower Operating
deals with multiple currencies. Capital ✅ Yes ✅ Yes (Cash Expenses)
❌ No (Not an
Expenditu (Increases out ow in
res (PPE) expense)
Impairment Losses → Write-offs for assets Assets) Investing) Cutting unnecessary expenses (e.g., reducing
losing value (e.g., factory closure). ❌ No (Debt ✅ Yes ✅ Yes (Cash marketing spend,
Loan
Legal Expenses & Fines → Lawsuits, penalties. Payments repayment is not (Liability out ow in outsourcing tasks).
an expense) Reduction) Financing) Improving ef ciency (e.g., automation, fewer
✅ Yes ✅ Yes (Cash employees needed for
📌 Impact: All these reduce net pro t, which Dividends
❌ No (Not an
(Reduces out ow in
affects nancial expense) the same work).
performance. Retained Financing)

📌 2. Expenses in the Balance Sheet (Liabilities 🔹 Observation: 4⃣ Lower Interest Expenses (Less Debt Burden)
& Reductions in Assets) Repaying loans reduces interest payments.
Net Pro t increased by €30M from 2022 to Getting loans at lower interest rates.
The Balance Sheet doesn’t show expenses 2023.
directly but re ects their impact as liabilities or We need to nd out why this happened.
asset reductions. 5⃣ Tax Bene ts or Lower Tax Rates
Step 2: Identify What Caused the Increase in
🔹 Current Liabilities (Short-Term Payables) Net Pro t
Government incentives or tax reductions.
Accounts Payable → Money owed to suppliers 💡 Possible Reasons for the Increase:
(expenses not yet paid). 🔹 Net Pro t Decreases (Negative Performance)
Short-Term Loans & Interest Payable ✅ 1. Higher Revenue (Sales)
→ Debt obligations within a year. 1⃣ Lower Revenue (Sales Drop)
Revenue increased from €2,400M to €2,500M
Accrued Expenses → Salaries, rent, utilities due (+€100M).
Fewer customers, lower demand.
but not yet paid. Possible explanation:
More customer demand. More competition lowering market share.
Taxes Payable → Unpaid corporate taxes. New product lines or expanded markets.
Increased pricing strategy.
🔹 Non-Current Liabilities (Long-Term Price reductions to attract sales but hurting
Obligations) ✅ 2. Better Cost Control (COGS & Operating pro t.
Expenses)
Long-Term Loans & Bonds Payable → Debt
nancing costs. COGS (Cost of Goods Sold) increased slightly 2⃣ Higher Cost of Goods Sold (COGS Increase)
Deferred Tax Liabilities → Taxes owed in future (+€50M), but revenue
periods. grew more (+€100M). Raw materials become more expensive (e.g.,
📌 Impact: in ation).
This means the company produced more without
Expenses that are not yet paid appear as a huge cost increase, Higher wages for factory workers.
liabilities. improving gross pro t.
Operating Expenses only increased by €20M Supply chain disruptions (e.g., shipping delays,
Some expenses (e.g., depreciation) reduce asset (from €580M to €600M), which is a smaller
values instead. growth than revenue. shortages).
This means cost ef ciency improved.
3⃣ Increased Operating Expenses
✅ 3. Lower Interest Expenses
📌 3. Expenses in the Cash Flow Statement
(Actual Cash Payments) Interest expenses decreased from €55M to Higher salaries, rent, or marketing expenses.
€50M.
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 If too much inventory builds up, it ties up
Expanding business but not yet making enough company resources
revenue. without generating
revenue.
4⃣ Higher Interest Expenses (More Debt or
High-Interest Loans) ✔ Exam-Style Answer (Full Marks)
If a company purchases €50M worth of
Taking on more debt increases repayment costs.
inventory on credit, the Balance Sheet will
re ect a €50M increase in inventory
Rising interest rates make borrowing more
(Current Assets) and a €50M increase in
expensive.
Accounts Payable (Current Liabilities).
5⃣ Higher Taxes This transaction does not immediately impact
the Income Statement, as expenses (COGS) are
Government increases corporate tax rates. recorded only when inventory is sold.

No longer qualifying for tax bene ts or In the Cash Flow Statement, there is no
exemptions. immediate cash out ow, but when the company
pays the supplier, it will reduce cash in operating
📌 Summary of General Explanation for activities. While this improves short-term liquidity,
excessive credit purchases can increase nancial
Exams
risk if inventory is not sold ef ciently."
✅ Net pro t increases when sales grow, costs
are controlled, debt is reduced, or tax savings
occur.
✅ Net pro t decreases when sales drop, costs
rise, debt becomes more expensive, or taxes
increase.

📌 Depreciation applies to physical assets and is

an accounting method to allocate their cost over
time. It has no immediate cash impact, as
buying equipment is recorded as an investment,
not an expense.
In future periods, the cost of the equipment
appears as depreciation expense in the Income
Statement, reducing Net Pro t. In 2024,
depreciation increased by €10M, meaning the
company recognized a higher cost for asset
usage.
However, depreciation does not reduce cash ow
directly because it is a non-cash expense. It is
added back to operating cash ow, helping the
company retain more cash while lowering
taxable income.”

📌 Step 1: What Happens When Inventory is

Purchased on Credit?

The company receives €50M worth of inventory

but does not pay cash immediately.
Instead, it records this as a liability (Accounts
Payable), meaning it has a debt to suppliers.

📌 Step 2: Impact on the Financial Statements

📊 1. Balance Sheet (Statement of Financial
Position)
Inventory (Current Asset) increases by €50M

→ Because the company now has more raw

materials or goods available.
Accounts Payable (Current Liabilities) increases
by €50M

→ Because the company owes this amount to

suppliers and must pay later.
📊 2. Income Statement

No immediate impact on Net Pro t.

→ Buying inventory is not an expense until it is

sold.

→ The expense (COGS) appears only when the

inventory is used or sold.
📊 3. Cash Flow Statement

No cash out ow yet because the company is

buying on credit.
Later, when the company pays the supplier, the
payment will be recorded as a cash out ow in
operating activities.
📌 Step 3: Interpretation of the Financial
Impact
✅ Short-term effect (Positive):
The company gets €50M worth of inventory
without spending cash immediately, improving
liquidity.
❌ Long-term effect (Risky):
If the company struggles to sell the inventory, it
must still pay suppliers, increasing nancial
pressure.
fl
fi
fi
fl
fl
fi
fi
fl
fi
fi
fi
fi
fl
fl