Accounting Flashcards
When A/P increases by $X, why might the Cash balance of the company increase by an amount as well?
The new A/P expense on the Income Statement which has not been paid in cash, results in savings in taxes at whatever tax rate
I.e $20 increase in A/P leads to 25% tax rate of $5
How do 3 FS relate to each other?
From the Income statement to Balance sheet:
- income after dividends paid flows to shareholders’ equity on the balance sheet under retained earnings.
- Debt on the BS is used to calculate interest expense on the IS
- net PPE on BS is used to calculate depreciation expense on the IS
From the cash flow statement to the balance statement:
- Cash from the ending BS to Cash on the CFS
3.
What is working capital? Why important?
measure of company’s efficiency and short term financial health.
Net WC is current assets - current liabilities
Positive means company is able to pay off ST liabilities
Why is EBITDA important?
Doesn’t take into account financing and accounting impact
Compare profitability across companies and industries
Cons: Also a non-GAAP measure
EBITDA vs. EBIT vs. NI
EBITDA is a proxy for core recurring CF from operations
EBIT is a proxy for core recurring profitability
NI is a measure of profit after capital structure and non core business activities
Better indicator of ongoing operational strength And ignores the impact of financing and accounting decisions
Interest expense is leverage not operations taxes are also non-operation depreciation amortization generally do not reflect operationOperation strength
Define operating income
Revenue minus cogs minus operating expenses
How do dividends appear in the financial statements
Dividends for preferred shareholders are subtracted from net income when reported
What is the use of Cash for a company?
Acquisition Capex Operational expense Share repurchase Dividend Financial investments
What are items on the income statement?
Revenue Cogs Gross profit Operating expenses Interest Taxes Net Income Preferred div NI remaining to common shareholders
Shareholders equity
Par value of common stock
Additional paid in capital
Retain earnings
Cash flow statement
CFO Net income Depreciation and amortization Other non-cash expense Change in working capital
CFI
Purchase and sale of investments in other companies
Purchase and sale of long-term assets
CFF Increase decrease in debt Payment of dividends Issuance of stock Repurchase stock
Assets and liabilities on balance sheet
Assets
Cash
Accounts Receivable
Inventory
If I only had one statement which would it be?
Cash flow statement
Gives a picture of how much cash do companies producing
What are deferred tax asset and liabilities and how do they arise?
Deferred tax liabilities arise when you have a tax expense on the income statement but actually haven’t paid tax in cash
Deferred tax asset rise when you Pay taxes in cash but have not expense them on the income statement
Most common and write ups and write downs in M&A
How to build a revenue forecast model
Bottom up approach which is start with individual products segments customers and Estimate a growth rate to apply
Top down approach which is start with big picture metrics like market size, estimate company market share and how that changes in coming years
