Accounting Flashcards
How do we treat an asset write-down on 3 statements?
“Write-down” is very similar to Depreciation: it’s an expense on the Income Statement that
reduces the company’s Pre-Tax Income and Net Income, you add it back as a non-cash expense
on the Cash Flow Statement, increasing the cash balance, and it reduces the company’s “Plants, Property & Equipment (PP&E)” on the Balance Sheet.
How do we treat Stock Based Comp on 3 statements?
Stock-based compensation shows up as an expense on the Income Statement and therefore reduces a company’s Pre-Tax Income, but just like Depreciation, it is a non-cash expense that you add back on the Cash Flow Statement.
However, there’s a critical difference between stock-based compensation and depreciation:
stock-based compensation creates extra shares and dilutes investors. So because of this dilution, you count it as a REAL cash expense when you estimate a company’s cash flows.
How do we treat Goodwill & Other Intangible Assets on 3 statements?
Whenever we pay more for a company than the Equity on its Balance Sheet says it’s worth,
the combined Balance Sheet will go out of balance.
The solution is to create two new Assets, Goodwill and Other Intangible Assets, to represent
the premium we pay for the other company.
Other Intangible Assets are: patents, trademarks, IP or customer relationships. We amortize the value of these over time.
Goodwill is “miscellaneous value” of the premium paid.
If you buy another company, how do you record it on your financial statements?
You combine the financial statements by adding the
other company’s statements to your own and track Equity one to one.
What are the 3 financial statements, and why do we need them?
IS, BS, CFS
IS: shows the company’s revenue, expenses, and taxes over a period and
ends with Net Income
BS: shows the company’s Assets – its resources – as well as how it paid for those resources – its Liabilities and Equity – at a specific point in time.
CFS: begins with Net Income, adjusts for non-cash items and changes in operating assets and liabilities (working capital), and then shows the company’s cash from Investing or Financing activities; the last lines show the net change in cash and the company’s ending cash balance.
Company Value is Cash Flow / (Discount Rate - Cash Flow Growth Rate); knowing how CF changes helps you value a company more accurately.
What’s the most important financial statement?
The Cash Flow Statement is the most important single statement because it tells you how much
cash a company is generating.
What if you could use only 2 statements to assess a company’s prospects – which ones would you use, and why?
You would use the Income Statement and Balance Sheet because you can create the Cash Flow Statement from both of those.
How might the financial statements of a company in the U.K. or Germany be different from those of a company based in the U.S.?
Direct Method versus GAAP (Indirect Method)
Income Statements and Balance Sheets tend to be similar across different regions, but
companies that use IFRS often start the Cash Flow Statement with something other than Net
Income: Operating Income, Pre-Tax Income, or if they are using the Direct Method for creating
the CFS, Cash Received or Cash Paid.
Naming conventions may be different as well, “Income Statement” may be called “Consolidated Statement of Earnings” or “P&L Statement”; Balance Sheet might be “Statement of Financial Position”
What should you do if a company’s Cash Flow Statement starts with something OTHER
than Net Income, such as Operating Income or Cash Received?
You should convert this Cash Flow Statement into one
that starts with Net Income and makes the standard adjustments.
