Financial Statement Modelling

Question 1

When sourcing information/data for a model, what is the difference between using company filings and equity research reports and consensus estimates?

Answer 1

Company filings are what the company thinks about the company whereas equity research reports are what others think about the company

Question 2

What are the 6 steps to building an integrated financial statement model?

Answer 2

1. Locate & input historical data
2. Forecast the income statement
3. Forecast the balance sheet
4. Derive the cashflow statement
5. Address circular reference issues
6. Scenarios & sensitivity analysis

Question 3

Where can you find depreciation if it is not in the income statement?

Answer 3

Cash Flow Statement

Question 4

Where can you find stock-based compensation if it is not on the income statement?

Answer 4

Cash Flow Statement

Question 5

What should you do when you see a line item such as “other non-current assets”?

Answer 5

Investigate into what “other” entails

Question 6

What is a company’s interest expense and interest income based on?

Answer 6

Debt and cash balances

Question 7

What are the two ways to calculate interest in financial models?

Answer 7

1. Interest Rate x Average Period Debt
2. Interest Rate x Beginning Period Debt

Question 8

How do you calculate the interest expense using the average period method?

Answer 8

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

Question 9

Is it more accurate to calculate interest expense using beginning debt or average debt? Which is more commonly used?

Answer 9

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

Question 10

What are the deficit and surplus plugs?

Answer 10

Deficit - Revolver
Surplus - Cash

Question 11

What is the circularity issue with using cash as the plug in a model?`

Answer 11

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

Question 12

How would you typically forecast other non-operating items on an income statement if there is no information available?

Answer 12

On a straight-line basis as opposed to it being tied to revenue