Accounting

Question 1

Basic Accounting

Answer 1

What do you own? owe? how much did you make?

Question 2

Balance sheet

Answer 2

what it owns and owes at a point in time, equity / ownership. Assets, liabilities, and equity

Question 3

Income statement

Answer 3

how much a business earned over a period, what it cost the company.

Revenue 
(Op Ex)
= Op Income
(Financing Ex)
(taxes)
= Net Income

Operating Expense = cost associated to operations where benefits are realized this year
Capital Expense = show up as an asset on BS, get written off during the lifetime as an asset in D&A
Financing Expense = borrowings to raise capital

Question 4

Cash flows

Answer 4

Starts with net income, inflows and outflows from operations (revenues generated this year labor, materials), investing (capital benefits over many years including equipment), and financing (use of non-equity capital bank loans). Net change in cash balance.

Question 5

Assets

Answer 5

an item that the company owns, with the expectation that it will yield future financial benefit

cash, cash equivalents, short-term investments, receivables

Question 6

Liabilities

Answer 6

In general, a liability is an obligation between one party and another not yet completed or paid for. Loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.

Question 7

Price to book ratio

Answer 7

value of the company if it is torn up and sold today. The book value usually includes PPE (equipment, buildings, land) and anything else that can be sold, including stock holdings and bonds.

mature industries falter in terms of growth, but can still be a good value based on their assets.

purely financial firms, the book value can fluctuate with the tend to have a portfolio of assets that goes up and down in value. Industrial companies tend to have a book value based more on physical assets, which depreciate year over year according to accounting rules.

In either case, a low P/B ratio can protect you – but only if it’s accurate. This means an investor has to look deeper into the actual assets making up the ratio.

Question 8

Interdependencies of statements

Answer 8

1) Net income links from IS to BS
2) Depreciation from the IS, capex from BS, need to be added back to net income to calculate cash flow from operations
3) Financing by issuing debt impacts all three
a) interest expense IS
b) principal amount of debt owed BS
c) delta principal CF

Question 9

Accurral accounting

Answer 9

record txns as they happen

Question 10

Accurral accounting

Answer 10

record txns as they happen vs. when cash changes hands

Question 11

Cash accounting

Answer 11

record revenues when you get paid for providing a product or service adds Accounts Receivable and Deferred Revenue as line items

Question 12

Equity

Answer 12

what company really has to name = net of liabilities and assets

Question 13

Operating Expenses

Answer 13

COGS, SG&A, Depreciation is used to minimize taxes paid (why depreciation may not measure up as depreciation see in tax statements)

Question 14

Financing Expenses

Answer 14

debt (bank loans, corporate bonds)

should include leases which is on the balance sheet like a 10y contract, need to account for interest expense

Question 15

Non-operating assets

Answer 15

• Cash & Marketable Securities: liquid instruments like Tbills, CP
• Cross Holdings in other companies

Question 16

Extraordinary income / expense

Answer 16

lawsuits, write-offs for mistakes

Question 17

Lifecycle perspective

Answer 17

Start-up, young growth, high growth, mature growth, mature stable, decline

Question 18

Differences in lifecycle

Answer 18

Young = Peloton - high rev growth, gross profits look healthy, R&D, big losses before taxes, negative net income (loses money)

Growth = Netflix - Cost of revenues decreasing but large, extraordinary items (gains or losses due to FX changes), positive net income (making money)

Mature = J&J - Revenue growth barely changes, expenses largest will be SG&A and almost as big as COGS (company may own plants bottling), equity income or loss from subsidiaries, makes even more money

Decline = auto - look at cost of financing, cash payments exceed cash income, the company’s cash flow is negative. If cash flow stays negative over a sustained period, it’s a signal that its cash could be running low and is insufficient to cover bills and other obligations.

declining revenues over extended periods, even when times are good = indicator of
operating weakness. It is even more telling if these patterns in revenues apply not
only to the company being analyzed but to the overall sector, eliminating the
explanation that the revenue weakness is due to poor management

negative operating margins, lost pricing power and must drop prices to keep revenues from falling further

This combination results in deteriorating or negative operating income at, with occasional spurts in profits generated by asset sales or one time profits.

Question 19

Nuisances of financial statements for a bank - income statement

Answer 19

Non-interest revenue (fees)
Interest revenue (from loans)
= Total Revenue

credit loss provisions 
net gain on trading A/L
= EBIT
Interest Expense
= EBT
Tax
= Net Income

Question 20

Nuisances of financial statements for a bank - balance sheet

Answer 20

Assets: property, trading, loans, deposits to central bank

Liabilities: loans from central bank, deposits from customers, trading liabilities, other debt

Equity: common / preferred shares

Question 21

Depreciation

Answer 21

used to minimize taxes paid