financial statements and accrual concepts Flashcards
1
Q
A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?
A
- spending too much on CapEx which is not reflected in EBITDA
- The company has high interest expense and is no longer able to afford its debt.
2
Q
How do you calculate the debt service coverage ratio (DSCR) and what does it measure?
A
- calculate whether debt can be repaid using cash flow
- greater than one means it can pay back debt
- DSCR = (EBITDA - CapEx) / (Principle repayment + interest)
3
Q
How would raising capital through share issuances affect earnings per share (EPS)?
A
- dilute EPS and hence less EPS worth
- however the cash from issuing shares increases NI, which increases EPS
- butissuing shares still has bigger impact bcuz returns on excess cash generated are low
- so still decreases EPS worth
4
Q
what does rentention ratio represent and how is it related to dividend payout ratio?
A
- retention ratio = (net income - net dividends) / Net Income
- Dividend payout ratio = Dividend paid/net income
5
Q
How to forecast current assets in working capital?
A
- AR: grows in line w revenue, DOS/365 * forecasted revenue
- Inventory: grow in line w COGS, DIH /365 * forecasted COGS
- prepaid expenses: related to SG&A (% of SG&A or revenue)
- other current assets: assume to grow w revenue or straight line growth
6
Q
what is the LIFO FIFO method and what are its implications on net income
A
- FIFO: goods purchased earlier would be the ones expensed first on IS
- LIFO: most recent purchase of inventorues are sold first
- If rising inv cost: FIFO would cause a decrease in COGS and higher NI, LIFO would cause increase in COGS and lower NI (vice versa for decrease inv costs)
7
Q
How are the 3 financial statements linked
A
????
8
Q
what flows into APIC?
A
APIC = old APIC + stock based compensation + stock created by option exercises
9
Q
Is EBITDA a good proxy for operating cash flow?
A
- not rlly because it doesnt include CapEx, which is rlly important for a company’s operations
- also doesnt include working capital
- nee to include non cash and non-rucurring adjustments to asses company’s past financial performance
10
Q
Normally Goodwill remains constant on the Balance Sheet – why would it be impaired and what does Goodwill Impairment mean?
A
- if during acquisition the buyer paid for a lot more than what the company is worth, and after acquisition during recalculation they realise the company was overpaid for and cant be recognised thru synergies, they write it off as goodwill impairment (an expense)
- or if they stopped a division of athe company and hence has to write off the goodwill associated with that
11
Q
why can current ratio be misleading soemtime?
A
- cash balance used includes the minimum cash amount required for working capital needs – meaning operations could not continue if cash were to dip below this level
- restricted cash and restricted marketable securities (need to be sold at discount)
- bad AR
12
Q
how to calculate DSO
A
DSO = (AR/Revenue )*365
13
Q
why woudl you use Net profit margin
A
- look at profitability of a company which is impacted by capitak structure and taxes
14
Q
10-K and 10-Q differences
A
- 10-K is annual, 10-Q is quarterly. Both are required by SEC for public compaies
- 10-K is more detailed and in depth, and 10-Q normally only has quarter financials and other sectioons ar ekept brief
- 10-K is required to be audited by indepenent accounting firms like Big 4, whereas 10-Qs ae left unaudited and only reviewed by CPAs
15
Q
why do we add back D&A, and impairment to cash flow statement
A
- because these are non-cash expenses—they reduce net income on the income statement but don’t actually involve any cash outflow.
- actual cash outflow for PP&E has already occured
16
Q
key line items of income statement
A
- revenue
- (less) COGS, SG&A
- EBITDA
- (less) D&A
- operating income (EBIT)
- pre-tax income (EBT)
- net income
17
Q
What is the relationship between return on assets (ROA) and return on equity (ROE)?
A
- they are tied through the use of debt
- increase in debt financing would increase assets and decrease equity used
- which would lead to an increase on ROE (bcuz less equity used) and decrease of ROA (asset akak cash increases while return on cash doesnt)
18
Q
What does change in net working capital tell you about a company’s cash flows?
A
- if net working capital increases its operating assets have grown and/or its operating liabilities have shrunk from the prior year
- increase in operating asset is cash outflow, hence it means less cash flow for a company
19
Q
why use EBITDA margin?
A
independent of capital structure, taxes and adjusted for non cash D&A and non recurring items
20
Q
how to project balance sheet items like AR, AE?
A
- Accounts Receivable: % of revenue.
- Deferred Revenue: % of revenue.
- Accounts Payable: % of COGS.
- Accrued Expenses: % of operating expenses or SG&A.
21
Q
Accrual vs cash based accounting
A
- Accrual: revenue recognised when its delivered, and expenses for that revenue are incurred in same period
- Cash based: revenue and expenses are recognised once cash is received or spent, regardless of when product was delivered
22
Q
How should you project Depreciation & Capital Expenditures?
A
as a % of revenye or previous PP&E balance
23
Q
What is difference between Common Stock, APIC, Preferred Stock, Treasury Stock
A
????
24
Q
if company has negative retained earnings is that bad?
A
- yes in a lot of cases
- no if the company is a stratup and is not yet profitable
25
how do 3 statements link tgt?
1. IS -> CFS: the net income flows into operating first line of cash flow statement
2. CFS -> BS: changes in NWC (operating cash) (current assets and liabilities) is also reflected in the current liabilities and assets, impact of CapEx on (investing cash) also reflected in PP&E on balance sheet, ending cash balance in CFS will slow into the cash in balance sheet
3. BS-> IS: PP&E D&A on BS is reflected on INcome statement as an expense, interest expense is also calculated off the balance sheet, Net Income (IS) minus dividend will give retained earnings (shareholder's equoity) for current period
26
why would you want to use gross margins?
if you want to look at the revenue remaining (or profitabikity) subtract COGS (direct costs associated w company revenue)
27
why is Why are cash and debt excluded in the calculation of net working capital (NWC)?
Net Working Capital (NWC) = Operating Current Assets − Operating Current Liabilities
- because they are non operational and dont generate revenue
28
walk me through 3 financial statements
1. Income Statement: balance sheet, cash flow statements
2. Income (aka PnL): revenue and expenses, goes down from revenue to net income (annual)
3. balance sheet: shows assets (cash, inventory, PPE), liabilities ( accounts payable, debt) and shareholders equity. split into current and non-current. Assets = liabilities + shareholders equity (annual)
4. Cash flow statement: begin w net income, adjust for non chase, and change in working capitral, then shows cahs flow from operating, financing and investing. end: see net change in cash (snapshot)
29
what are some profitability margins?
1. Gross margins: Gross profit (just subtract COGS only)/rev
2. Operating Margin: EBIT/Revenue
3. Net Profit Margin: Net Income/Revenue
4. EBITDA margin: EBITDA/Revenue
30
What does negative Working Capital mean? Is that a bad sign?
1. depends
2. company which have a lot of long term contract often have negative NWC cuz of high deferred revenue (counts as liability), amazon customers pay upfront before they send it out, to generate cash to pay accounts payable rather than keeping cash on hand - business efficiency
3. however, NWC can mean financial trouble if customers dont pay quicky and company is alr carrying high debt balance
31
How do you calculate the fixed charge coverage ratio (FCCR) and what does it mean?
- The fixed charge coverage ratio (FCCR) is used to assess if a company's earnings can cover its fixed charges, which can include rent, utilities, and interest expense.
- higher ratio = better credit
- FCRR = (EBIT+lease charge) / (lease charge + interest expense)
32
When do you capitalize vs. expense items under accrual accounting?
The factor that determines whether an item gets capitalized as an asset or gets expensed in the period incurred is its useful life (i.e., estimated timing of benefits).
- item dependes on whether being capitalized as an asset or gets expensed in the period incurred is its useful life (i.e., estimated timing of benefits).
- if item is long term benefit to company (PP&E), then lifetime depreciation, hence capitalized and expensed over time
- if item is short term and benefits are short term, then the related expense should be done in the same period. (i.e expense for wages needs to be in same period as employee doing the work)
33
please break down the line items of assets in Balance sheet
- Current Assets (in order of liquidity)
1. Cash and Cash Equivalents: cahs + short term gov bonds
2. Marketable securities: short term debt or equity securities than can be liquidated quickly
3. Accounts receivable: payments owed to bsuiness by its customers for product/service which is alr been delivered (like IOU)
4. Inventories: raw materials, unfinished/finished goods waiting to be sold + direct costs associated to producing these goods
5. Prepaid expenses: prepaid expenses in advance for good/services to be provided at a later date (i.e insurance, rent)
- Non -current assets (hard to liquidate)
1. PP&E Property Plant and Equiptment:
2. Intangble Assets: non-physical assets such as IP or patents
3. Goodwill: Intangible asset to account for the extra purchase price of a fair market value of an acquired asset
34
major lines for cash flow statment
- 3 sections: cash from operations, cash from investing, cash from financing
- operating: Net income + non cash expense (D&A), stock based compensation, change in NWC
- investing: CapEx, business acquisitions or divestitures,
- financing: (shows raising capital from issuing debt or equity): cash from repurchase of shares, repayement of debt, dividend of shareholders
- some of each section = total net change in cash
- add to begining of period cash (retained Earnings) = ending cash balance
35
how is goodwill increased?
1. normally when u reassess the intangible asset of a company (but v rare)
2. more generally it acts as a plug for when you purchase a company for a lot of money over its fair market value, the extra money will be written as goodwill on acquirers balance sheet
36
operating lease vs capital lease
1. operating lease shows up in operating expense: short term lease of PP&E, do not involve ownership of anything
2. Capital lease are longer term items and give the lessee ownershio rights, they cand depreciate and incur interest payments. Counted as debt.
3. counts as capital lease if: can be bought at the end term w bargain price, is a transfer of ownership at end term, term of the lease is >75% of the useful life of an asset,
37
what are some non cahs expenses that need to be added back during CFS
1. D&A
2. goodwill write down
3. asset writedown
4. stock based compensation
38
what are some ratios to use to perform credit analysis
1. liquidity ratios: ability for company to meet is obligations using current assets. current ratio, quick ratio, cash ratio
2. leverage ratios: looks at how company uses debt and whether these debt obligations can be met. Debt/EBITDA, Debt/Assets, Debt/Equity
3. coverage ratios: company ability to pay interest, pay off debt, and other debt related obligations using cash flow metric. EBITDA Interest, Debt service coverage ratio, fixed charge coverage ratio
4. Profitability ratios: whether company can consitantly generate profit. Gross, operating, net profit margins, EBITDA margins, ROE, ROA, ROIC
39
are intangible assets on balance sheet
1. internally developed IP cannot be recorded on BS, no value can be asisgned to IPs
40
what is current ratio and quick ratio
1. both used to see if company can meet its short term obligations w short term assets in present moments, greater than 1 means it is financially healthy
2. current ratio = Current assets/current liabilities.
3. quick ratio = (cash & cash eqivalents + AR + short term investments)/ current liabilities
4. quick ratio measures short term liquidity
41
limitatiosn of using ROE and ROA for company comparison?
1. only suitable if the compared company are in same industry, w similar growth, and risks
2. so not suitable in looking at companies which have v differet growth rates risks or are at different stages of the cycle (starup vs mature)
42
what are the main sectioons of a 10-K
3 core financial statements and a stetement of shraholders equity and a statement of comprehensive income. Also supplementary data and disclosures.
- Business overview: includes strategies, divisions, geographies...etc
- Management discussions and analysis: comment on last fiscal year based on management perspective
- Financial statements: The “Core 3”: Income Statement, Balance Sheet, Cash Flow Statement The “Other 2”: Statement of Comprehensive Income, Statement of Shareholders’ Equity
- Supplementrary notes for more detail abt the statements
43
what is net working capital and what does it mean?
1. working capital = current assets - current liabilities
2. to see if company in short term can pay off its liabilities, sortof means if the company is in good financial health
3. operating working capital = (current assets - cash) - (current liabilities - debt) (used more in models
44
what is inventory turnover
1. inventiry turnover = number of times in a time period the invenyory was sold and replaced
2. inventory turnover = COGS/avg inventory
3. DIH= (inventory/COGs)* 365 looks at inventory to revenue
45
why is income statement less sufficient to assess liquidity of a company?
- accrual based accounting: inflated net income because of accounts receivable
- some sales are made on credit, if cant get the receivables from customers, can lead not enough cash which is not reflected on IS
- cash flow statement reconciles net income based on actual cash inflow and outfliw to understand actual cash impacts due to 3 types of activities (operating, investing, financing)
46
If you have a balance sheet and must choose between the income statement or cash flow statement, which would you pick?
- given start and end period balance sheets, would choose cash flow
- can reconcile cash flow from income statement and balance sheet by looking at balance sheet’s year-over-year changes along with the income statement
47
accounts receiveable, accounts payable, accrued expenses, and deferred revenue
1. AR is an asset (cash): customer got the product but hasnt paid yet
2. Deferred Revenue (liability): customer paid upfront (subscription) but not yet received products -> will become revenue on IS once received product
3. AP: (liability): company received product from supplier but hasnt paid yet (received on credit and hasnt paid)
4. Accrued expenses (liability) = rent, utility, wages (not yet time to pay)
48
deferred revenue vs accounts receivable
1. deferred revenue = item not delivered to customer, but they alr paid (liability)
2. accounts receivable, item delivered to customer but havent paid (asset)
3. AP = delayed payment to suppliers (liability)
49
Which is more important, the income statement or the cash flow statement?
The income statement and cash flow statement are both necessary, and any in-depth analysis would require using both. However, the cash flow statement is arguably more important because it reconciles net income, the accrual-based bottom line on the income statement, to what is actually occurring to cash.
This means the actual movement of cash during the period is reflected on the cash flow statement. Thus, the cash flow statement brings attention to liquidity-related issues and investments and financing activities that don't show up on the accrual-based income statement.
50
Please break down the line items for Liabilities section
- Current Liabilitie
1. Accounts payable: Received products from SUPPLIERS and service but paid w credit
2. Accrued Expenses: are incurred expensed such as utilities that is normally due to invoice not being received
3. Short term debt: Debt payments coming due within 12 months, with the current portion of long-term debt also included.
- Non current liabilities
1. Deferred revenue: Unearned revenue received in advance for goods or services not yet delivered to the customer (can be either current or non-current), 预订了然后付了全款但是还没给客户东西
2. Deferred Tax: tax expense recognized under GAAP but not yet paid because of temporary timing differences between book and tax accounting.
3. Long Term Debt: debt exceeding 12 months
4. Lease: long term contractual agreements, allowing a company to lease PP&E for a specific time period in exchange for regular payments.
51
how to forecast PP&E and intangible assets?
End of Yr PP&E = Begining of yr PP&E + Capex - depreciation
* capex should be inputed as a negative number
EOP Intangibles = BOP Intangibles + Intangibles Purchases – Amortization
52
what happens to the 3 financial statement sif company initiates a dividend?
- IS: no change to IS, but another line under Net Income to show DPS (divident per share) to show amount paid in divident
- CFS: Financing section shows decrease in dividend paid from net income, hence lower cash balance
- BS: cash balance decline by dividend amount and reflected in retained earnings (decrease)
53
How to calculate gross profit
Revenue (or sales) - COGS
54
hwo does cahs flow capture interest expense
- no specific line on CFS captures Interest, but it is alr included in Net Income line (comes from IS which alr accounts for interest expense)
55
If company stocks went up by 10% how does it impact balance sheet
- doesnt impact
- shoreholders equity looks at book value of equity and not market cap, book value of equity is initial historical amount on balance sheet for accounting purposes
- This represents the company's residual value belonging to equity shareholders once all of its assets are liquidated and liabilities are paid off.
- book value of equity = tital assets - total liabilities
56
how to calculate DIH
DIH = (Inventory/COGS)*365
57
ROA vs asset turnover ratio
1. ROA is more abt profitability (Net income)
2. asset turnover measures operational efficiency at making rvenue
3. ROA better used in capital intensive heavy industries to see how much profit its actually making
4. asset turnover used in asset light industries like retail where revenue generation speed is important as there is not much capital intensive stuff
58
COGS vs SG&A
1. both operating expense, both on IS
2. COGS directly related to the sales of products, direct material and labor cost
3. SG&A indirect operating expense such as: rent, payrll, marketing, comissions
59
what is retained earnings?
- the cumulative amount of net income a company has kept or "retained" after paying out dividends to shareholders.
- It’s essentially the portion of profits that’s reinvested back into the company rather than distributed to shareholders
60
what does accounts receivables measure?
- shows how efficient company is at collecting payments from customers who paid on credit
- high ratio means better
- receivables turnover = revenue/avg AR
61
What are examples of non-recurring charges we need to add back to a company’s EBIT / EBITDA when looking at its financial statements?
1. anything above operating income (the line) has to affect the operating activity
2. goodwill impairment
3. asset write down
4. legal expenses
62
how should increase in inventory by $200 be reflected in the 3 statements.
1. IS: no change as inventory not yet sold
2. CFS: operating income = -200, total cash balance = -200
3. BS: assets: +200 in inventory, cash = -200, L+E: retained earnings not affected, balanced
63
explain major line items of shareholders equity
1. common stock: the par value of however much stock a company has issued
2. retained earnings: How much of the company’s Net Income it has “saved up” over time.
3. Additional paid in capital: stock based compensation for employees, options, extra par value a company raises in IPO
4. treasury stock: dollar amount of how much stock is bought back
5.acculumulated other comprehensive income: foreign currency exchange rates...etc
64
How to get to pre-tax income and net income from revenue
1. revenue - COGS = gross profit
2. Gross profit - SG&A (not COGs but operating expenses: wages, marketing) - R&D = EBITDA
3. EBITDA - D&A = EBIT (or operating income)
4. EBIT - (net) interests = pre-tax (EBT)
5. EBT - tax = Net Income
65
what is accrual based accounting and why is it bad?
- accrual-based accounting is an accounting method that records revenue and expenses when they are earned or incurred, rather than when cash is actually received or paid
- can cause inflated earnings because it doesnt yet show that the cash has been received, can influence reported profits
66
how is AR, AP and deferred revenue captured on IS
- it is not
- it is only indirectly captured in revenue and expenses, no specific line for it
- revenu recognizerd in same period as the. item was delivered, whether or not cash was received
67
Which is more important, the income statement or the cash flow statement?
- reconciles net income to to what is actually occuring to cash
- actual movement of cash
- can show liquidity related issues and investing and financing activities
- less affecte dby accounting method: literally shows movement of cash, and excludes non-cash (not prone to accrual based accounting)
- shows whether it has enough cash to pay its debt obligations and reinvest in operations
- However when valuating a unprofitable/negative profit company, wnat to look at Income statement instead because u can use revenue multiples, CFS not useful if company profit is negative
68
walk me through an income statement
- Income statement: shows company's profitability over a specific period (quarterly or anually). The beginning line item is revenue, and you move down the statement by deducting various costs and expenses and the bottom line is net income
- Net Revenue/Sales (top line)
- less: COGS (cost of materials and direct labour)
- Arrived at: gross profit (revenue - COGS)
- Less Selling General and Administrative (SG&A): operating expenses whicha re not directly reated to products/service sold, i.e marketing, wages)
- Less R&D: costs use to develop new products/service
- Arrive at: EBITDA (Gross Proft - SG&A - R&D)
- Less D&A: non-cash expense that estimates the annual reduction in the value of fixed and intangible assets
- Arrive At: EBIT/Operating Income = EBITDA - D&A
- Less Interest Expense: Interest expense from debt, net of interest income generated from investments
- Arrive at EBT/Pre-Tax Income: EBIT - Interest
- Less Tax
- Arrive at Net Income
69
walk me through the 3 financial statements
- Income statement, balance sheet, and cash flow statement
- Income statement: shows company's profitability over a specific period (quarterly or anually). The beginning line item is revenue, and you move down the statement by deducting various costs and expenses and the bottom line is net income
- Balance sheet: The balance sheet shows a company’s assets, liabilities, and equity sections at a specific point in time. (not over time)
- Cash flow statement: Shows cash inflow and outflow over a period of time (quarter/annual), and starts w net income being adjusted for non-cash items and changes in working capital to arrive at operating cash. Then cash from investing and financing are added to it to show net change in cash (which representets cash inflow/outflow
70
what are 2 ways to calculate EPS
1. basic EPS (accounts for common shares or shares outstanding) = (NI-dividende on preferred stock) /basic Weighted average shares outstanding
2. diluted EPS (considers potentially dilutive secruities such as warrants, options, convertible securities): (NI-dividende on preferred stock) /diluted Weighted average shares outstanding
71
Could you ever end up with negative shareholders’ equity? What does it mean?
1. yes, 2 scenario. 1: LBO recapitalization: which means owner taken out large equity/cash from company
2.if company keep losing money year by year, leading to negative retained earnings balance (company not doing well)
72
How do you decide when to capitalize rather than expense a purchase?
- capitalize (put it as an asset in balance sheet) rather than expense on the income statement
- when useful life is longer than 1 yr (depreciated and amortized) = capitalize
73
what is cash conversion cycle?
1. days it takes to convert its inventory to cash
2. CCC= DIH + DSO-DPO
3. lower CCC means more bargaining power and more efficiency
74
what is ROIC used to measure
1. ROIC return on invested capital, how efficient the capital is allocated sustainably
2. NOPAT = net operating profit after tax
3. if ROIC high then good allocatio/return on invested capital (15% is v good)
4. ROIC = NOPAT/Invested capital (equity and debt)
5. ROIC higher than WACC means the company can generate returns more than the minimum amount to return for investors
75
amortization vs depreciation
1. same accounting roles as adepreciation
2. but amortization used for intangible assets like IP
76
Why would the Depreciation & Amortization number on the Income Statement be different from what’s on the Cash Flow Statement?
1. can happen if D&A is embedded in other lines of IS
2. in this case need to use CFS to arrive at EBITDA because otherwise undercounting D&A
77
2 types of ratios to asses companys risk?
1. leverage ratio: amount of debt held by a company to a specific cash flow metric, most often EBITDA. Total Debt/EBITDA
2. Interest coverage ratios: to measure if company cash flow can cover its interest expense. EBIT/Interest expense, EBITDA/Interest expense
78
Walk me through balance sheet
- The balance sheet shows a company’s assets, liabilities, and equity sections at a specific point in time.
- The fundamental accounting equation is: Assets = Liabilities + Shareholders’ Equity.
- Asset: organized in the order of liquidity, represents inflow of cash
1. Current Assets: (i.e cash being assets that can be converted into cash within a year (like cash, short term debt, stocks, accounts receivable..etc)
2. Non-Current Assets: PP&E, Intangible assets (IP/patents), goodwill
- Libilities:Current and non-current, represents inflow of cash from other sources of capital like moneys owed to suppliers, or debt)
1. Current Liabilities: Announts Payable, accrued expensed, short term debt
2. non-current liabilities: deferred revenues, deferred taxes, long term debt, lease obligations
- Shareholders Equities: internal sources of equity which help fund the business, capital invested into business, canbe from internal or external investors. Also shows retained earnings from last year
1. Shoreholders equitY: Common stock, Preferred stock, APIC, treasury stock, retained earnings, OIC
79
hwo to calculate DPO?
DPO = (AP/COGS )*365
80
how to get to operating income from revenue
1. revenue - COGS = gross profit
2. Gross profit - SG&A (not COGs but operating expenses: wages, marketing) - R&D = EBITDA
3. EBITDA - D&A = EBIT (or operating income)
81
Important lines in Balance sheet
1. assets = liabilities + shareholders equity, split into current and long term, in order of liquidity
2. Cash & equivalent, securities, AR, inventory, prepaid expenses, PP&E, Intangible assets (IP, patent), goodwill
3. Liabilities: AP, accrued expense, short term debt, deferred revenue, deferred tax, long term debt (mature 12month +), lease
4. Shareholders equity: common stock, preferred stock, retained earinings, OCI
82
what ratios to look at for working capital management efficiency
1. days inventory held (DIH): avrg number of days for company to sell off its inventory (try to minimize)
2. days sales outstanding (DSO): avg number of days it takes for a company to collect payments made on credit
3. Days payable outstanding: days payable to pay back suppliers
83
how would $10 depreciation flow through financial statements, assuming 30% tax rate
1. IS: from Operating Income: -10, Net Income: -7 (account for 30% tax)
2. CFS: In operating activity: Start w NI = -7, +10 bcuz non cash expense, no change in NWC, and hence overall change in cash = +3
3. BS: Assets: Cash= +3, PP&E will -10 (depreciated annually) (hence total = -7), Equit and Liability: Net Income is reduced by -7, so overall retained earnings also -7, balance sheet balances
84
Walk me through the lines for shareholders equity
1. Common Stock: equity when raising capital from outside investors
2. Additional Paid In Capital APIC: the difference between the par value of a stock and the price that investors actually pay for it. To be the "additional" part of paid-in capital, an investor must buy the stock directly from the company during its IPO
3. Preferred Stock: combines characteristics of both stocks and bonds. It is considered equity in a company, but it pays out like a bond, with regular cash distributions and fixed payment terms.
4. Treasury Stock: shares that had been previously issued but were repurchased by the company in a share buyback and are no longer available to be traded.
5. Retained Earinings: Cumulative earnings from last year less dividends paid
6. Other Comprehensive Income: OCI foreign currency translation adjustments and unrealized gains or losses on available for sale securities
85
How to forecast current liabilities in working capital?
1. AP: grow w COGS, DPO/365 * COGS
2. Accrued expense related to SG&A
3. deferred revenue grow in line w revenue, part of the company business model
4. current liabilities, grow w revenue or straight line
86
above the line vs below the line margins?
1. the line is operating income, operation business and non opertaional lines
2. EBITDA is above the line and is used to compare while being independent of cpaital structure and looks at company's operations
3. Net income is below the line, it is not adjusted for operations only and looks at it including non-operational expenses such as tax
87
why would you use operating margin
1. operating amrgin (EBIT)
2. This measure is useful for comparisons due to being independent of capital structure and taxes.
88
Walk me through Cash flow statements
Indirect
1. Cash from Operations: Net Income add back non-cash expenses (D&A) and stock based compensation, then adjust working capital
2. Cash from Investing: Cash from Investing (mostly CapEx) , followed by business acquisitions/divestitures
3. Cash from Financing: et cash impact of raising capital from issuances of equity or debt, net of cash used for share repurchases, and repayments of debt. The cash outflows from the payout of dividends to shareholders
4. Total: sum of 3 sections = net change of cash for this period. Ass this back to beginning period cash balance to arrive at ending cash balance
89
how to create expense or revenue model for company
- bottoms up approach
- Revenue: start w individual producte, estimate average sale value, and growth rate in sales and tie everything tgt
- Expense: look at each division of company, nmbe rof employee and avrg salary, and then assume employee number tied to revenue, assume growth rates for salaries. COGS tied to revenue
90
how long before FY ends does 10-k or 10-Q have to be filed
10-Ks must also be filed ~60-90 days after the fiscal year ends, whereas 10-Qs must be submitted ~40-45 days after the quarter ends.
91
what is asset turnover ratio
1. asset turnover ratio = revenue / avg total assets
2. how many dollars of revenue is generated in one dollar on assets, efficiency a comoany uses to measure asset
3. can be distorted by CapEX
92
what is accounts payable turnover ratio?
- measures how quicly a company pays its vendors
- longer time for AP means more cash on hand
- Accounts payable turnover = revn/avg AP
- lower means slower cash outflow
93
What is the difference of Accounts payable, Acccounts Receivable, Accrued Expenses, Deferred Revenue and Prepaid Expenses
?????
94
What is the relationship between depreciation and the salvage value assumption?
- salaveg
95
how to calculate change in net working capital?
- salvage value = residual value = total depreciable amount
- is salvage value =0, highest tax benefit and higher depreciation expense
- Straight Line Annual Depreciation = (Asset Historical Cost − Salvage Value)/Useful Life Assumption
96
how to get to EBITDA from revenue
1. revenue - COGS = gross profit
2. Gross profit - SG&A (not COGs but operating expenses: wages, marketing) - R&D = EBITDA
97
what are some accrual based accounting which can inflate earnings?
1. using life-assumptions to reduce annual depreciation
2. switching from LIFO to FIFO if Inventory costs are expected to increase, which causes higher NI
3. not writing down of impaired assets, increase NI
4. deferring R&D and CapEx to make this period appear more profitable
5. **Revenue Recognition Principle: Revenue is recorded in the same period the good or service was delivered (and therefore "earned"), whether or not cash was collected from the customer.**
98
what is a share vs debt?
1. share is a unit of equity ownership of the company, it is a way to raise capital
2.debt is also a way to raise capital by promising to pay back the loan
99
what does return on assets and return on equity mean?
- ROA = net income/ avg begining and ending total assets
- ROE = net income/avg begining and ending of book value of equity
- measures profitability of a company to see how efficient the company is at using its assets or equity to make returns
100
straight line or accelerated depreciation
1. companies prefer straight line, because lower depreciation recorded on early years where the asset is more useful, hence results in higher net income and EPS in initial years
2. companies focus on more near term (more recent) income/financials
101
- Let’s say Apple is buying $100 worth of new iPod factories with debt. How are all 3 statements affected at the start of “Year 1,” before anything else happens?
- Now let’s go out 1 year, to the start of Year 2. Assume the debt is high-yield so no principal is paid off, and assume an interest rate of 10%. Also assume the factories depreciate at a rate of 10% per year. What happens? asusme tax = 40%
1. IS: no change, as not yet sold, CFS: operating activity = -100 (for debt), cash change = -100, BS: Asset: +100 (PP&E), Cash = 0, Liability = +100, balanc eout
2. IS:D&A = -10, Interest = -10, (both are tax deductible = +8), net = -12, CFS: -12 (NI) + non cash D&A = +10, no change in NWC, cash balance = -2. BS: Cash = -2, PPE = -10, ShareE: -12. Balances
102
If you have a balance sheet and must choose between the income statement or cash flow statement, which would you pick?
Assuming that I would be given both the beginning and end of period balance sheets, I would choose the income statement since I could reconcile the cash flow statement using the balance sheet’s year-over-year changes along with the income statement.
103
what flows into retained earnings?
retained earnings = last years (old) retained earnings balance + Net Income - dividend issued
