Accounting Flashcards
What are the 3 financial statements
IS / revenue and expenses. Net income as final line of the statement
BS assets, resources and liabilities. Golden rule being assets equals liabilities and S.H.E
CFS begins with NEt income and
adjusts for non cash expenses and working capital changes
lists CF from investment and financing activities
reports change in net cash position
Depreciation is up by 10
IS
Depreciation is an expense
Operating income would decline by 10. Assuming a 40% tax rate, net income is down by 6.
CFS
Net income is down by 6
Depreciation is a non cash expenses that has to be added back for full amount, 10 (CF op)
Net cash up by 4
BS
PPE goes down by 10, cash is up by 4 and therefore assets is down by 6. To balance out S.H.E is down by 6
Why does depreciation, a non cash expense, affect cash balance
It is tax deductible, and taxes are a cash expense. So Depreciation affects cash balance by reducing amount of taxes you must pay
Accrued compensation up by 10
Accrued compensation is now being recognized as an expense
IS
Operating expenses is up by 10, PTI falls by 10 and NI falls by 6
CFS
NI falls by 6
Accrued compensation will increase OP CF by 10
Net cash is up by 4
BS
Cash up by 4
Accrued compensation liability is up by 10
Retained earnings down by 6 similar to NI
Inventory up by 10 all cash
No change to income statement
CFS
Inventory is an asset therefore decreases CF from operations by 10
Net cash down by 10
BS
Cash by 10, Inv up by 10
Why is IS not affected by changes in inventory
Expense is only recognized when the goods associated to it are sold, so if it is inventory sitting in a warehouse, it does not affect COGS
Buy factory 100 CHF with debt Y1
CFS
Additional investment is a negative CF from investment
Debt is a positive cash flow from financing
Net cash is constant
BS
100 in PPE
Debt 100 CHF
100 in factories bought with high yield debt, so no principal repayment. IR 10% and amortization 10%. Record after year 1.
We must record the depreciation and interest expense
IS
Operating income is reduced by 10 for depreciation and 10 for interest rate.
PTI down by 20, NI down by 12
CFS
NI down by 12
Depreciation is a non cash expense for which we must readjust by adding 10 into operational CF, net cash flow minus 2
BS
Cash is down by 2
PPE is down by 10
NI down by 12, so SHE down by 12 and all balance
NO DEBT PAID BACK
Equipment write down and loan repayment
Write down is a non cash expense
First, determine residual value of equipment or factories based on amortization (2 years at 10%, 80% of original value remains)
IS
80 write down reduces by 80 PTI
NI reduced by 48
CFS
NI down by 48
Write down is a non cash expense so it must be added back to CF OP for 80 (32 positive CF OP)
CF from financing decreases by 100 for loan pay back
Net cash decreases by 68
BS
Cash is down 68
PPE down by 80
Debt down by 100
NI down by 48
Both sides balance
Ordering 100 inventory cash
IS
/
CFS
Inventory up by 10, an asset, so CF OP down by 10
BS
Inventory up by 10
Cash down by 10
Balance.
Sell ipod for 20, COGS 10
IS
Revenue up by 20
COGS up by 10
Gross profit is 10
Operating income up 10
Net income up 6
CFS
NI up by 6
Inventory decreased by 10 which increases CF by 10
Net cash has additional 16
BS
Net cash up by 16
Inventory is down by 10
Net income up by 6
Balance
Negative S.H.E.
Can happen in two scenarios
Dividend recap in an LBO. This means the owner has taken out large portions of equity which could render SHE negative
Or if company is losing money consistently and therefore retained earnings is always declining / sign of a struggling company
Net working captial
C.A minus C.L.
A company can pay off its short term liabilities with short term assets, company is sound
Negative NWC
Could be due to a business model with high deferred revenue balances (subscriptions)
Could allude to possible bankruptcy
Could be because customer pays upfront so cash geenrted is used to pay off Acc Payable rather than keep cash (retail, restaurants). Could be a sign of efficiency
Asset write down
An asset write down is recorded on le IS as a loss. Non cash expense.
So PTI down 100, NI down 60
CFS
NI down by 60
Adjusted in CFOP by 100
Net cash up 40
BS
Cash up by 40
Asset in question is down by 100
Balances out with NI down by 60
100 Bailout
Bailout as equity investment from the government
No IS change
CFS
CF Fin up y 100
Net cash up by 100
BS
Cash up by 100
SHE up by 100
Liability (debt) write down 100
Liability write downs are recorded as a gain on IS
IS
PTI up by 100
NI up by 60
CFS
NI up by 60
Subtract debt write down in CF OP by 100
Net cash down by 40
BS
Cash down by 40
Debt down by 100
NI up 60
Why collect cash and not record revenu
Example in subscription or annual contracts.
Collect cash upfront but, per GAAP rules, you only recognize revenue when you perform the service.
Cash goes into deferred revenue as a liability. As the service is performed, it turns into real revenue on IS.
Acc Receivable vs Deferred revenu
Accounts receivable pertain to a service that was performed for which cash has not been collected yet
Deferred revenue is for which cash has been collected but, service not yet performed
Cash vs accrual accounting
Cash based accounting recognizes revenues and expenses when cash is exchanged
Accrual accounting recognizes revenue when collection is reasonably certain (order is put in) and expenses when they are incurred rather than paid out
Buying with a credit card, cash vs accrual
Cash
Revenue only shows up when transaction goes through. Shows up as revenue on IS and cash on BS
Accrual
Revenue right away, and AR in BS
Once cash is obtained, it will turn into cash
Capitalize (cost) or expense a purchase
If the asset has a useful life over a year, it is capitalized (put on BS) and then is depreciated or amortized
Factory is capitalized
Salary is expensed
GAAP vs non GAAp
IS under GAAP doesn’t really reflect how profitable a company is because of IS write downs (deferred revenue, amortization)
Non GAAP earnings are almost always higher because these expenses are excluded
Positive EBITDA but bankruptcy
Large CAPEX not reflected in EBITDA
High interest expense, cannot afford it
All debt matures at once, cannot refinance and is in a credit crunch, runs out of cash
As significant one time charge, enough to bankrupt
EBITDA excludes investments and depreciation of long term assets, interests and one time charges. All of these could bankrupt the company.
Goodwill impairment
Company is acquired and buyer reassesses the intangibles and finds they are worth significantly less than previously thought
Buyer overpaid
Or it can be the company discontinues part of its operations and must impair associated goodwill
Goodwill increase
Can increase if a company reassesses its value and it thinks it higher, rare
Usually a company is acquired and goodwill changes as a result of being the plug for purchase price in an acquisition
Company acquires another company and pays more than what assets are worth, reflected in goodwill
GAAP
Accrual based, straight line depreciation
What is retained earnings
How much of the company’s net income it has saved up
Retained earnings equals
Old retained earnings balance, plus net income, minus dividend issued
What non recurring charges are added back to companys EBITDA
Restructuring, goodwill impairment, asset write down, legal expenses, disaster expenses
Projection of balance sheet items
AR as % of revenue
Deferred revenue as % of revenue
AP as % of COGS
Accrued expenses as % of operating expenses
COGS up by 10
If we are increasing COGS, it is that we are recognizing the expense attached to the sale
IS
If we sell for 20, COGS is 10, operating income is up by 10
NI up by 6
CFS
NI up by 6
Sale of inventory unlocks cash 10
Net cash position increases by 16
BS
Cash up by 16
Inventory down by 10
NI up by 6
Balance
Receivables up by 10
IS
PTI is up by 10
NI up by 6
CFS
NI up by 6
Deduct 10 because AR is non cash
CF down by 4
BS
Cash down by 4
Receivables up by 10
SHE up by 6
After collection no change to IS. CFS up by 10, Cash on BS up by 10, SHE up by 10
