Accounting Fundamentals Flashcards
What does the income statement show?
A company’s revenue, expenses and taxes over a period of time
What criteria do income statement items need to meet?
Must correspond to given period, must impact the income available to common shareholders
Whats the difference between common stock and preferred stock?
Both stocks are a form of ownership in a company, preferred stockholders have a higher claim to the company’s assets and dividends than common stockholders(Get paid first in liquidation instances)
What’s the order of the income statement?
Revenue, COGS, OPEX, D&A, OP income, EBIT
What does the balance sheet show?
A snapshot of a company’s resources; its assets, liabilities, and shareholder equity
Why might a company’s assets not = its liability + equity
Either the company has resources that have not been accounted for, or has raised funding that is not marked towards assets
What is an asset?
Something that results in future benefits for the company, such as an additional cash flow, additional ability to grow the business
What is a liability or equity line item
Something that will result in a future obligations for the company such as a cash payment, the requirement to deliver a certain product or service
What is common shares equity?
This is a funding source that either comes internally (via net income) or externally (stock issuance)
What does the cash flow show?
Shows the full journey over cash within a company from cash flow from investing, cash flow from operating activities and cash from financing
What does the cash flow from operating activity show?
Starts with Net income, adjusts for non-cash items and then factors in how operational balance sheet items change within the period
What does the cash flow from the investing section show?
Anything related to the company’s investments, acquisitions and PP&E
What does cash flow from financing show?
Items related to debt, dividends and issuing/repurchasing shares (corresponds to long term liabilities)
What are 3 major line items for the income statement?
Revenue, cost of goods, SG&A
What are 3 major line items for the Balance sheet statement?
Inventory, PP&E, Shareholders Equity
How do all the statements link together?
The net income from the income statement affects retained earnings, a component of shareholders’ equity on the balance sheet. Net income is also the topline of the cashflow statement. Finally, the changes in cash from the cash flow statement are reflected in the cash line item on the balance sheet.
How are changes to the balance sheet likely to manifest in the cashflow?
Via working capital (Operating activities)
What is the at a glance purpose of the income statement?
Profitability ( via EBITDA)
What is the at a glance purpose of the balance sheet statement?
Financial position
What is the at a glance purpose of the cashflow statement?
Cash movements
If you were stranded on a desert island,what statement would you pick to evaluate the overall health of a company?
Cashflow- it shows the true picture of how much cash a company generates, independent of non cash expenses
Pick only 2 statements to assess a company’s prospects
Income and balance sheet, your’re able to create the cash flow for both
What is working capital?
Worknig capital is the money the business needs to operate day to day
Working capital formula?
Current assets - current liabilities
How can you interpret working capital?
If the number is positive it means the comp can pay off its short term liabilities with its short term assets
What is enterprise value?
It represents the value of a company that is attributable to all investors
What is equity value?
Only represents the portion available to shareholders
Why do we look at both?
Equity value is the number the public at large sees white enterprise value is the true value
When looking at an acquisition of a company, do you look at enterprise or equity value
Enterprise value because thats how nuch an acquire really oays and includes debt repayments
Enterprise value formula
Equity value +debt +preferred stock+minority interest - cash
What is the impact of depreciation going up by $10 on the income statement?
No change to revenue, expenses may go up due to the increase in depreciation expense. No direct hit to EBITDA, but there is a decrease in Operating income (EBIT) due to an additional $10 of depreciation being deducted from EBITDA. Tax is calculated using Operating income so the amount paid in tax is reduced. Net income declines
What is the impact of depreciation going up by $10 on the cashflow statement?
Net income is lower, depreciation is a non-cash expense, so it is added back to net income in the operating activities section
Why is depreciation added back to the cash flow?
Net income includes all expenses, both cash and non-cash, therefore adding back depreciation ensures that the cash flow from operating activities reflects the true cash-generating capacity of the company.
What is the impact of depreciation going up by $10 on the balance sheet?
$10 increase in accumulated depreciation, and a $10 decrease in net PP&E
