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Accounting > Accounting 101 > Flashcards

Accounting 101 Flashcards

1
Q

What is EBITDA?

A

Earnings before interest, tax, depreciation, and amortization

Found on income statement as operating profit + depreciation and amortization

EBITDA can be used to track and compare the underlying profitability of companies regardless of their depreciation assumptions or financing choices.

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2
Q

Walk me through the three financial statements.

A

Income statement = revenues & expenses
Balance sheet = assets, liabilities & equity
Cash flow statement = cash inflows & outflows

  1. Income Statement: shows revenues and expenses over a period of time
    - used to assess profitability
  2. Balance Sheet: gives us a snapshot of a business’ assets, liabilities, and equity at a single point in time
    - shows us what a business owns and owes
    - tells us how much a business is worth to its owners
  3. Cash Flow Statement: shows cash inflows and outflows over a period of time
    - reconciled back to movement in the balance sheet
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3
Q

Walk me through the income statement.

A
  1. Income Statement - summarizes a business’ revenue and expenses over a period of time; used to assess profitability

Sales Revenue
- COGS
= Gross profit

  • Operating Expenses (General & Admin, Sales & Marketing, Depreciation & Amortization)
    = EBIT (Operating Profit)
  • Interest & Taxes
    NET INCOME!!
  • NET INCOME IS FIRST LINE ON CF STATEMENT
  • follows accruals accounting
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4
Q

Walk me through the balance sheet.

A
  1. Balance Sheet - snapshot of a company’s assets, liabilities, & equity

Assets = liabilities + equity
(L) economic items that company earns that can hopefully generate cash
(R) how left side is financed

Assets: (Ordered based on liquidity)
*Current Assets (can be converted to cash within 1 yr)
- Cash & Cash equivs (=balance found at the end of the cash flow statement)
- Accounts receivable ($ that customers owe the company)
- Inventory
*Non-Current Assets
- Property, Plant & Equipment
- Investment property

Liabilities: (Ordered based on due date)
*Current Liabilities(due within year)
- Accounts Payable
*Non-Current Liabilities
- Pension liabilities
- Deferred tax liabilities
- Long-term debt

Equity: ($ company owes back to the owners of the business)
- Capital Contributions (orig $ investors injected)
- Retained Earnings: profits that the company has held onto

**Net income from the income statement flows into the balance sheet as a change in retained earnings

If the business were to sell off all of its assets and pay off all of its debts, this equity is how much the owners would get

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5
Q

Walk me through the cash flow statement.

A
  1. Cash Flow Statement - shows cash inflows and outflows over a period of time
    - needed if company is using accruals accounting

CASH FLOW FROM OPERATING ACTIVITIES (core biz activities, how much $ the co brought in through reg operating activities)
+ Cash receipts from customers
- Cash paid to suppliers/employees
- Interest, taxes

CASH FLOW FROM INVESTING ACTIVITIES (outside of core activities; cash inflow/outflow from investments and buying/selling PP&E)
- Purchase of property, plant, equipment
+ Cash receipts from sales of PP&E

CASH FLOW FROM FINANCING ACTIVITIES (funding the biz through debt or equity)
- Change in long-term debt
- Change in common equity
- Dividends paid

CASH BALANCE
Beginning of Period Cash
Increase / Decrease
[ End of Period Cash ]

*EOP CASH SHOWS UP ON AS FIRST LINE ON BALANCE SHEET

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6
Q

What is accrual accounting?

A

When revenue and expenses are recorded when a transaction occurs regardless of when money exchanges hands

  • debit AC on balance sheet when serviced
  • credit AC on balance sheet when paid
  • Journal entries are made when a good or service is provided rather than when payment is made or received. Entries are also made for debts and payments due.
  • This method allows the current and future cash inflows or outflows to be combined to give a more accurate picture of a company’s current and long-term finances.
  • The method follows the matching principle, which says that revenues and expenses should be recognized in the same period.
  • It follows double-entry accounting, where there are generally two accounts used when entering a transaction

-Required for companies with average revenues of $25 million or more over three years.

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7
Q

What is cash accounting?

A

recognizes transactions only when there is an exchange of cash

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8
Q

Consulting Example for Cash Accounting

Consulting company provides $5k service on Oct 30th, and receives cash payment on Nov 25th

A

Cash accounting -

Under the cash basis method, the consultant would record an owed amount of $5,000 on Oct. 30, and enter $5,000 in revenue when it is paid on Nov. 25 and record it as paid

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9
Q

Consulting Example for Accrual Accounting

Consulting company provides $5k service on Oct 30th, and receives cash payment on Nov 25th

A

Accrual accounting -

  • debit AC on balance sheet when serviced
  • credit AC on balance sheet when paid
  • On Oct 30th when the service was provided, they would enter a debit of $5,000 in accounts receivable (debits increase an asset account)
  • When the payment is made on Nov. 25, the consultant credits (credits decrease an asset account) the accounts receivable by $5,000 and credits the service revenues account, a revenue account (credits increase a revenue account) with $5,000.
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10
Q

What is EBIT and where is it found?

A

EBIT is earnings before interest and taxes, AKA operating profit

Found on income statement, EBIT = sales revenue - COGS - operating expenses

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11
Q

What are retained earnings and where are they found?

A

Retained Earnings (RE) are the profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business.

  • used for working capital and capital expenditures or allotted for paying off debt obligations
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12
Q

Compare the time frame for each of the financial statements.

A

Income Statement and Cash Flow Statement = a period of time

Balance Sheet = a point in time

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13
Q

What is the purpose of each financial statement?

A

Income Statement: Profitability - measures the revenue and expenses

Balance Sheet: Financial position (what the biz owns and owes) - measures the assets, liabilities, and equity

Cash Flow Statement: Cash movements - measures inflows and outflows of cash

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14
Q

What are the sections of the cash flow statement

A

OIF

CASH FLOW FROM OPERATING ACTIVITIES (core activities = how much $ the company brought in/spent through normal biz operations)
Cash receipts from customers
- Cash paid to suppliers/employees
- Interest, taxes

CASH FLOW FROM INVESTING ACTIVITIES (cash inflow/outflow from investments and buying/selling PP&E)
- Purchase of property, plant, equipment
+ Cash receipts from sales of PP&E

CASH FLOW FROM FINANCING ACTIVITIES (funding the biz through loans or equity)
- Dividends paid

NET INCREASE IN CASH

Opening Cash
Closing Cash

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15
Q

What is the start and end point for each financial statement?

A

Income Statement: Revenue -> Net Income

Cash Flow Statement: Net Income -> Cash Balance

Balance Sheet: Cash Balance -> Retained Earnings

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16
Q

What is depreciation?

A

Depreciation is the expensing a fixed asset (tangible objects acquired by a business) as it is used to reflect its anticipated deterioration.

Ex: buildings, equipment, office furniture, vehicles, and machinery

17
Q

What is amortization?

A

Amortization is the practice of spreading an intangible asset’s cost over that asset’s useful life.

Ex: patents, trademarks, franchise agreements, copyrights

18
Q

What is enterprise value vs equity value?

A

Enterprise value is what an entire company is worth and would be how much money is needed to purchase a whole company

Enterprise value = equity value + debt - cash

(In order to buy a whole company, you need to purchase all of its equity, plus any debt, minus cash bc you can use the company’s cash to pay down debt)

Equity value is the value of a company that is owed to equity investors

Equity value = enterprise value - debt

19
Q

What is DCF Analysis?

A

Discounted cash flow (DCF) analysis is a valuation technique to derive the intrinsic value of a company based on projected future cash flows

  • forecast a company’s likely future cash flows and then discount them back to present value
20
Q

What is the value of a company according to DCF analysis?

A

The value of a company is a sum of all of its future free cash flows discounted back to present value

21
Q

What is FCFF and FCFE

A

FCFF = free cash flow to the firm = cash that’s left over after the company had made all payments that it needs to make

FCFF = net cash from operating activities - cash taxes paid - capital expenditure

FCFE = free cash flow to equity

  • equity holders may not be interested in FCFF bc debt holders have higher priority and will take their share first, so they look at FCFE

FCFE = FCFF - net payment to debt holders

FCFE = [cash from op activities - taxes paid - capex] - debt

22
Q

What is capital expenditure

A

Capital expenditure = Money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment

23
Q

How do you calculate terminal value?

A

Terminal multiple method

  • terminal multiple = industry standard figure that is multiplied by one of the financial metrics - such as EBITDA - to give a value for a company’s future cash flows from the end of the visible period into perpetuity

terminal value = 6.5 * 10mm (EBITDA of terminal year)

Then PV it…

(FCF / (1+WICC)^yr) + …..
….. + (FCF + Terminal value)/(1+WICC)^yr)

24
Q

What is GAAP

A

generally accepted accounting principles

a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB)

Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.

25
Q

Debit and credits on Balance Sheet

A

On the asset side of the balance sheet, a debit increases the balance of an account, while a credit decreases the balance of that account. When the company sells an item from its inventory account, the resulting decrease in inventory is a credit. In the example of the loan transaction above, the increase in cash would be recorded as a debit to the company’s cash on hand, increasing it by the loan amount.

On the liabilities side of the balance sheet, the rule is reversed. A credit increases the balance of a liabilities account, and a debit decreases it. In this way, the loan transaction would credit the long-term debt account, increasing it by the exact same amount as the debit increased the cash on hand account. The debit to cash and credit to long-term debt are equal, balancing the transaction.

Under equity, Retained earnings, increase when credited. Dividends, on the other hand, increase when debited.

Accounting (2 decks)

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