Basic Questions Flashcards
4 Main Financial Statements? Give their equations
• Income Statement
o (Rev - COGS – Exp = Net Income)
• Balance Sheet
o (Assets = Liabilities + Shareholder’s Equity)
• Cash Flow
o (Start Cash + CFf Operations + CFf Investing + CFf Financing = End Cash)
• Statement of Stockholder’s Equity ( Shareholder’s or Owner’s Equity)
o (= Assets - Liabilities)
How are 3 Main Financial Statements Connected?
• Net Income from Income Statement to Cash Flow
o As CF from Operations or Operating Activities
• Net Income from Income Statement to Balance Sheet
o In calculation of Dividends
• Beginning Cash from Balance Sheet to Cash Flow
o Cash from Balance Sheet is used in Cash Flow Statement as Beginning and Ending Cash
What is the Income Statement and its stages?
First: Revenues or Sales Cost of Goods Sold is subtracted o Gives: Gross Profit OPEX are subtracted o Gives: EBITDA Depreciation / Amortisation subtracted o Gives: EBIT Interest Expense and Taxes subtracted o Gives: Net Income
If you can choose 1, which Financial Statement you choose to evaluate a company? What do other 2 not show?
Cash Flow
o Shows liquidity of company
o How much cash is generated / used
• Balance Sheet: does not show performance
• Income Statement: non-cash expenses unrelated to performance shown
What would your company’s budgeting process look like? What are its 5 specifications?
has feed-in from all departments in the company
realistic - yet strives for achievement
risk-adjusted for margin of error
is tied to the company’s overall strategic plan
should be easy to follow by everyone in the company
What makes a financial model good? Give 5 points?
Inputs separated from outputs
Interconnected variables amongst the model
Error checks at multiple stages
Contain detail in relation to the use: not too much not too few
Lean dashboards for input variables and key outputs
What happens to income statement if inventory goes up?
Nothing
o Only Balance Sheet and CF reflect inventory
What does negative working capital mean? Give example?
For a grocery store, customers pay upfront, inventory moves relatively quickly, but suppliers often give 30 days credit. This means that the company receives cash from customers before it needs the cash to pay suppliers.
Negative working capital is a sign of efficiency in businesses with low inventory and accounts receivable.
In other situations, negative working capital may signal a company is facing financial trouble if it doesn’t have enough cash to pay its current liabilities.
When do you capitalise rather than expensing a purchase?
If will be used more than a year, capitalised and depreciated
Why consider issuing Debt instead of Equity?
To optimise capital structure
o If its income is taxable, then debt can help benefit with tax
o If it has steady cash flows and able to make interest payments, then issuing debt lowers WACC
How does an inventory write down affect the 3 Financial Statements?
Balance Sheet: Asset account of Inventory reduced by writedown amount
Income Statement: Expense in COGS reducing net income
CF: writedown added back to CFf Operating Activities
Why would 2 companies merge?
- Cost savings
- Enter new markets
- Gain new tech
- Eliminate competitor
- Advantage in financial metrics
If you were CFO of your company, what keeps you at night? Reasons per statement and outside of statments?
Income Statement o Growth Rates o Margins o Profitability Balance Sheet o Liquidity o ROA o ROE CF o Short-Term & Long-Term cash profile o Need to raise money? o Returning capital to shareholders? Other than statements o Company structure and mission o Government regulation o Condition in the market as a whole
Difference of Debt vs Equity?
Debt involves borrowing money to be repaid, plus interest
Equity involves raising money by selling interests in the company
Which is cheaper, Debt or Equity? Why is it cheaper?
Debt is cheaper
o It is paid before equity and has collateral backing it
