Financial Statements (Week 4) Flashcards
What is the Balance Sheet?
A “snapshot” of company assets and liabilities at a specific point in time.
What is the Income Statement?
Presents the flow of income generated from operations
What is the statement of cash flows?
Reports the cash flows in and out of the company from operating, investing and financing activities.
If Wilson collects $20k of Accounts receivable, what happens to the balance sheet?
Accounts receivable decreases by $20k
Cash goes up by $20k
Wilson sells $15k worth of inventory for $20k. What happens to the income statement and balance sheet?
Sales increases by $20k and COGS increases by $15k, resulting in an increase in Net Income by $5k and increase in balance sheet equity of $5k.
Assets also increase by $5k since A/R increases by $20k and inventory falls by $15k.
What is cash accounting?
Cash accounting only considers transactions in which there are cash receipts or disbursements. If you don’t get the money it’s not revenue, and if you don’t write a check it’s not an expense.
What is accrual accounting?
Used in GAAP (Generally Accepted Accounting Principles) - focuses on transactions that will have cash consequences, whether immediately or in the future.
What is the matching principle?
The matching principle underlies accural accounting and records the revenyes and expenses at the time of the sales transaction even if there are no immediate cash consequences.
Wilson receives and pays cash for $100k of lumber inventory on March 1.
Does this amount get expensed on March 1?
Although the cash was paid, an increase in inventory is not an expense and does not hit the income statement when purchased. By purchasing lumber, Wilson reduces cash and increases inventory, thus maintaining the same level of total assets. The inventory purchase only hits the income statement when inventory is sold.
Wilson employs a company to maintain and repair the saws and mills on a monthly basis. The company charges Wilson $120k per year, payable at the begining of the year. In what period does the $120k hit the income statement?
Because the service is rendered over 12 months, Wilson expenses $10k each month over the course of the agreement.
Wilson purchases a $10,000 saw for the mill
Do these $10,000 get expenses in the year that the saw is purchased, i.e. do they show up as an operating expense?
If the machine purchase is capitalised (recorded as PPE), none of it is expenses in the current period.
The asset is depreciated gradually over its “useful life”
What is the leverage ratio?
Liabilities/Assets
What is Interest Coverage?
EBIT/Interest
What is the Current Ratio?
Current Assets/ Current Liabilities
Days of Inventory Ratio
(INV/COGS) x 365
Example
ROE = 15%
Leverage Ratio = 2/3
You pay no dividends and cannot raise additional equity.
But you try to gorw at 25%.
Debt has to grow to 780 to support 25% growth in the assets.
Debt must grow by 30%, and the leverage ratio increases!
