ASimpleModel Basics+DCF Flashcards
How can a company build cash on the balance sheet?
1) Debt 2) Equity 3) Retained earnings
(Can also build through 4) selling assets and 5) managing NWC)
How is the income statement and balance sheet linked?
They are linked through retained earnings and net income - Re1 = Re0 + net income - dividends (simplified)
Why is not all revenue created equal?
Revenue is not created equal because in some cases you need to build NWC to fund the revenue - leading to a higher need to fund the NWC (thus increasing debt/equity need - and thus interest/dividend needs)
What’s the formula for change in Equity balance as a supporting schedule?
Beginning equity
(+) stock based compensation expense
(-) repurchase of common stock
(+) Option proceeds
(-) cash dividends
(+/-) Effects from FX
= Ending Equity balance
What is the formula for Cash dividend payout ratio?
Dividend / Net income
True or False: The repurchase of common stock has a negative impact on the equity account.
True
True or False: Cash dividends have a positive impact on the equity account.
False
What changes when you purchase an equipment on the 3-statements?
How does an increase in the Allowance for Doubtful Accounts impact the income statement?
Pretax income is reduced by the increase in bad debt expense.
How does an increase in the Allowance for Doubtful Accounts impact the balance sheet?
The increase will reduce Accounts Receivable, Net and consequently result in a lower Day Sales Outstanding.
For payment terms 1/10, net 30, what does the 1 mean?
That the customer will receive a discount of 1% if payment is received within 10 days.
Journal entry for a credit sale:
Accounts Receivable Debit
Cash Not Included in Journal
Revenue Credit
Journal entry for a payment made by a customer:
Accounts Receivable Credit
Cash Debit
Revenue Not Included in Journal Entry
Match the items below to create the journal entry for a write off (customer fails to make a payment) under the Direct Write Off Method.
Cash Not Included in Journal Entry
Accounts Receivable Credit
Bad Debt Expense Debit
Under the Direct Write Off Method there is a risk that accounts receivable might be __________?
Overstated
Under the Allowance Method how frequently is bad debt expense recorded on the income statement?
In each accounting period.
Match the debit and credit with the appropriate line item to record the purchase of equipment with cash:
Cash credit
Equipment debit
True or False - An increase in depreciation will cause gross margin to increase by the same amount.
False
What is the problem with Allowance for Doubtful Accounts and Accounts Receivable Financial Reporting: the “Direct Write Off Method”
Typically this will happen in a different accounting period, which creates two issues: (1)
it is a problem under the matching principle because the failure to pay is recorded in a
different period, and (2) it means assets (in this case AR) might be overstated.
Where can you typically find D&A on the income statement?
It’s not always there, but usually baked into COGS - sometimes written out. To get the correct value look in CFO
What best describes the Risk-Free Rate?
Compensation required for the time that elapses before cash flows materialize.
What present value impact will a higher cost of capital have on projected future cash flows?
PV decreases
The cost of capital is determined by the yield an investor requires to be compensated for time and ________________.
risk
Formula for the Discount Factor.
=1 / (( 1 + Cost of Capital ) ^ (Year))
True or False: The risk premium is represented by the additional yield required out of concern that the cash flow might not materialize.
True
formula for the Cost of Equity:
(risk-free rate of return) + (Beta)*(risk premium)
If a company’s Beta is less than one, which of the following is true?
It is theoretically less volatile than the market on average.
formula for the Risk Premium.
(expected market return) - (risk-free rate of return)
Why is the Cost of Debt multiplied by (1 - Tax Rate)?
To account for the tax shield created by interest expense.
True or False: Financing-related tax shields are included in free cash flow.
False
