Accounting Flashcards
Are one-time gains reported on the IS?
Yes, in a separate line
A company had positive EBITDA for 10 years, but went bankrupt, how is that possible?
They could be capital intensive and incur a high cost of PPE
They could have been too highly levered
What is goodwill? Where is it?
The premium that a company pays in acquiring another company, compared to comp-based fair value
Goodwill doesn’t amortize, but it can be impaired
Walk me thru $10 of goodwill impairment t=40%
nonrecurring expense on IS
addback on CFO
goodwill line decreases, RE decreases
Walk me thru $10 depreciation increase, t=40%
IS D&A +10, NI -6
CF D&A +10, cash +4
BS cash +4, PPE -10 / RE -6
Walk me thru $10 SBC, t=40%
IS: operating cost +10, NI -6
CF: addback +10, cash +4
BS: cash +4 / Common stock +10, RE -6
A company sells PPE, which is worth 100, for 120. Walk me thru, t=40%
IS: record $20 gain on separate line, NI +12
CF: -20 to avoid double counting
CFI +120 because it’s negative capex
cash +112
BS: cash +112, PPE -100 /
RE + 12
A company sells $100 of products at 50% gross margin, walk me thru, t=40%
Rev +100, COGS + 50, EBT + 50, NI + 30
-50 to avoid double counting gains, +100 in NWC decrease –> cash +80
BS: Cash +80, inventory -50, RE + 30
A company has $500 of debt with 10% PIK interest, walk me thru t=40%
IS: interest ex + 50, NI -30
FC: addback + 50
change in cash: +20
BS: cash + 20 / Debt + 50, RE - 30
You acquired another company for $1000 in cash, that company’s SE was $500, you identified $100 worth of intangibles with a useful life of 5 yrs, what happens on the year after? t=40%
IS: D&A -20, NI -12
CF: D&A addback + 20
cash = +8
BS: cash + 8, intangible assets -20 / RE -12
A company purchases $500 of inventory with debt, walk me thru, t=40%
IS no change
CF: NWC -500, CFF +500, no cash change
BS: inventory + 500 / debt + 500
A company purchases $500 of inventory with debt, walk me thru, t=40%
a year passes
company sells all the inventory for $1200. It recorded litigation expense of 200. The company paid 10% on debt and repaid 50% in principal, t=40%
IS: gross profit + 700, liti expense -200, interest + 50, EBT +450, NI + 270
CF: +270, NWC inventory + 500, CFF - 250, change in cash +520
BS: +520, inventory -500 / debt - 250, RE + 270
What does AR increase and decrease mean?
increase: company sold goods to customers
decrease: company collected payment
What is working capital? What is operating working capital?
Working cap = current A - current L
if you can stay liquid without liquidating long term assets
Operating working cap = current A w/o cash - current L w/o debt
Is it bad to have negative operating working capital?
No, it can be in the nature of the business
1. software subscription model
2. large retailers that take cash upfront to pay their AP, shows they’re efficient
3. or could mean insolvency
In the case of 1 and 2, revenue is not recorded due to the conservative principle
Walk me thru a $100 bailout of a company
Govt makes an equity investment
CFF +100 to reflect investment, cash + 100
SE +100
Walk me thru $100 write down of debt, t=40%
Debt writedown +100
NI + 60
CFO -100
change in cash -40
cash -40
liabilities -100, NI +60
Why do companies report GAAP and non GAAP earnings?
Non GAAP earnings exclude some expenses, like SBC, amortization of intangibles and deferred rev.
Companies would argue that non GAAP is a better reflection of their profitability.
How do you decide when to capitalize rather than expense a purchase?
If an asset as a useful life of over 1 yr, it’s capitalized (D or A)
Salaries, COGS are expensed
How to create a revenue model for a software company?
2 methods
1. bottom up: calculate rev from p*q of each product
2. top down: estimate the total market size, then the addressable, serviceable markets
How to create an expense model for a company?
Bottom up
COGS is a percentage of rev
Calculate and add each element of SG&A
What flows into RE?
RE = old RE + NI - dividends issued
what flows into additional paid in capital?
APIC = old APIC + SBC + stock created by option exercises
Walk me thru +10$ of deferred rev
This is unearned, so it doesn’t go on IS
CFO def rev +10
Cash +10
BS: cash +10, Def rev (L)+10
