Financial Statement Modelling Flashcards
When sourcing information/data for a model, what is the difference between using company filings and equity research reports and consensus estimates?
Company filings are what the company thinks about the company whereas equity research reports are what others think about the company
What are the 6 steps to building an integrated financial statement model?
- Locate & input historical data
- Forecast the income statement
- Forecast the balance sheet
- Derive the cashflow statement
- Address circular reference issues
- Scenarios & sensitivity analysis
Where can you find depreciation if it is not in the income statement?
Cash Flow Statement
Where can you find stock-based compensation if it is not on the income statement?
Cash Flow Statement
What should you do when you see a line item such as “other non-current assets”?
Investigate into what “other” entails
What is a company’s interest expense and interest income based on?
Debt and cash balances
What are the two ways to calculate interest in financial models?
- Interest Rate x Average Period Debt
- Interest Rate x Beginning Period Debt
How do you calculate the interest expense using the average period method?
Add the total debt balance from the end of the previous period and the end of the current period, and divide by two, then take that number and multiply it by the tax rate
Is it more accurate to calculate interest expense using beginning debt or average debt? Which is more commonly used?
It is more accurate to use average, as the debt total changes over the period, however, debt (revolver) is often used as the plug, and using average debt would create a circularity in the model, and therefore many analysts use beginning
What are the deficit and surplus plugs?
Deficit - Revolver
Surplus - Cash
What is the circularity issue with using cash as the plug in a model?`
Cash balance depends on interest income, but interest income also depends on cash balance.
Since cash is finalized only after completing both the balance sheet and cash flow statement, you can’t accurately calculate interest income until the cash balance is determined
How would you typically forecast other non-operating items on an income statement if there is no information available?
On a straight-line basis as opposed to it being tied to revenue
What is the first step in forecasting a a balance sheet?
Forecasting Working Capital
How do you forecast inventory?
Grow with COGS
How do you forecast prepaid expenses?
If prepaid expenses comprise expenses predominantly classified as SG&A, grow with SG&A. If you aren’t sure, grow with revenue
How would you estimate A/P on a balance sheet?
If the payables generated predominantly for inventory, grow with COGS. If you aren’t sure, grow w/ revenue.
How do you forecast PP&E (BOP)?
Reference from last period’s EOP
How do you forecast CapEx?
Use equity research or management guidance when available. In the absence of guidance, assume purchases with historical trends as a % of sales.
How do you forecast depreciation?
There are two approaches:
1. Forecast as a % of CapEx using historical depreciation as a guide
2. Depreciation waterfall analysis (useful when companies provide sufficient details)
How do you forecast asset sales?
Most companies do not regularly offload assets as a matter of course, so barring specific guidance, assume 0
How do you forecast prepaid expenses?
If prepaids comprise predominantly classified as SG&A, grow w/ SG&A. If you aren’t sure, grow with revenue.
How do you forecast other current assets?
Grow with revenues (bc they are usually tied to operations) unless there are no reasons to believe that they are tied to operations, then straight-line
How do you forecast accrued expenses?
If the accrued expenses are largely for expenses that will be classified as SG&A, grow with SG&A. If unsure, grow w/ revenue.
