Accounting Advanced Flashcards
How is GAAP accounting different from tax accounting
GAAP is accrual based but tax is cash based
GAAP uses straight line depreciation or a few other methods whereas tax accounting is different
GAAP is more complex and more accurately tracks assets/ liabilities whereas tax accounting is only concerned with revenue/ expenses in the current period and what income tax you owe
What are deferred tax assets/ liabilities and how do they arise?
They arise because of temporary differences between what a company can deduct for cash tax purposes vs. what they can deduct for book tax purposes.
Deferred Tax Liabilities arise when you have a tax expense on the income statement but haven’t actually paid that tax in cold, hard cash yet; Deferred Tax Assets arise when you pay taxes in cash but haven’t expensed them on the Income Statement yet.
The most common way they occur is with asset write ups and write downs in M&A deals. An asset write up will produce a deferred tax liability while a write down will produce a deferred tax asset.
Walk me through how you create a revenue model for a company.
There are two ways you could do this:
Bottom up - start with individual products / customers, estimate the average sale value or customer value, and then the growth rate in sales and sale values to tie everything together.
Top Downs - Start with “big-picture” metrics like overall market size, then estimate the company’s market share and how that will change in coming years, and multiply to get their revenue.
Walk me though what flows into retained earnings
Retained earnings = old retained earnings balance + Net Income - Dividends Issued
through what flows into additional paid - in capital (APIC)
APIC = Old APIC + Stock-based compensation + Stock created by Option exercises
What is the statement of shareholders’ Equity and why do we use it?
The major items that comprise Shareholders’ Equity, and how we arrive at each of them using the numbers elsewhere in the statement.
You don’t use it too much, but it can be helpful for analyzing companies with unusual stock-based compensation and stock option situations.
How should you project Depreciation & Capital Expenditures?
The simple way: project each one as a % of revenue or previous PP&E balance.
The more complex way: create a PP&E schedule that splits out different assets by their useful lives, assumes straight-line depreciation over each asset’s useful life, and then assumes capital expenditures based on what the company has invested historically.
What’s the difference between capital leases and operating leases?
Operating leases are used for short term leasing of equipment and property, and do not involve ownership of anything. Operating lease expenses show up as operating expenses on the income statement.
Capital leases are used for longer-term items and give the lessee ownership rights; they depreciate and incur interest payments and are counted as debt.
Why would depreciation & amortization number on the income statement be different from what’s on the cash flow statement?
This happens if D&A is embedded in other Income Statement line items. When this happens, you need to use the cash flow statement number to arrive at EBITDA because otherwise you’re undercounting D&A.
