Accounting

Question 1

What are assets?

Answer 1

Thing that a company owns

Current assets - used within one year

Non-current assets - last more than a year

Question 2

What are liabilities

Answer 2

These are what a company owes

Question 3

What is equity?

Answer 3

What the business is worth after all the liabilities is paid off

Question 4

What are retained earnings? What is the formula?

Answer 4

the amount of net income left after it has paid out dividends to its shareholders

Current year retained earnings = last year retained earnings + net income - any dividends paid

Question 5

How to prepare a cash flow statement using the indirect method?

Answer 5

3 types

Cash flow from operating activities

Cash flow from investing activities

Cash flow from financing activities

> > CF from operating activities

1. Start with Net Income
2. Add back all of the noncash expenses (depreciation, amortization)
3. Adjust for movement in working capital

Question 6

How would a $10 depreciation charge affect the 3 financial statements?

Answer 6

Start with the income statement
Assume a tax rate of 40%

Depreciation is a non-cash operating expense
Operating expenses increases by 10

Earnings before taxes is 10 higher
Income tax expense is 4 less

Then moving on to cash flows
Net income decreases
Adjustment for D&A increases
Cash flow from operations increases by 4

The real cash benefit from depreciation is that we pay less taxes; therefore more cash for the business

Then move on to the balance sheet
Cash increases by 4
Total Current Assets increases by 4

Net PP&E decreases by 10

Net total assets decreases by 6

Retained earnings decreases by 6 (Net income fell by 6)

Question 7

Equity value vs enterprise value

Answer 7

Enterprise Value - entire value of the business (includes market cap but also considers long term debt)

Formula for enterprise value = equity value + debt - cash

Question 8

How do you calculate the value of the firm using DCF?

Answer 8

Cash flows for forecastable period + terminal value

Question 9

What is the formula for FCF?

Answer 9

EBIT less cash taxes = NOPAT, then add back D&A, less capex, less changes in NWC

Question 10

Formula for equity value

Answer 10

enterprise value + cash - debt

Question 11

what is internal rate of return?

Answer 11

the discount rate that makes NPV zero

expected compound annual rate of return that will be earned on a project or investment