FSA

Question 1

what is financial statement analysis?

what is the focus of financial statement analysis?

Answer 1

financial statement analysis is the process of examining a company’s performance in the context of its industry and economic environment

the focus of financial statement analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of that capital, to profitably
grow its operations, and to generate enough cash to meet obligations and pursue opportunities.

Question 2

what are the sources on information in financial statement analysis?

Answer 2

1. audited financial statements
2. additional disclosures
3. comments by management (unaudited)

Question 3

why is cash the ability to generate positive cashflows although profitable important?

Answer 3

because ultimately, a company need to pay salaries, suppliers, and interest in order to continue as going concern

Question 4

difference between liquidity and solvency

Answer 4

liquidity: ability to meet short term obligations

solvency: ability to meet long term obligations

Question 5

what is the financial postition of a company?

Answer 5

the comparison between the resources controlled by the company (assets) and the claims against those resources (liabilties and equity)

Question 6

how are the three financial statements linked?

Answer 6

net income from the income statement flows into shareholder’s equity on the balance sheet, and into the top line of the cash flow statement

Question 7

how does D&A going up 10$ affect the financial statements? assume tax rate is 30%

Answer 7

• IS: EBT goes down by 10, Net Income goes down by 7
• CF: Net income down by 7, add back 10 of D&A, CF of the year increases +3
• BS: Cash (+3), Fixed Assets (-10), Equity (-7)

*although Depreciation is a non tax expense, it affects cash balance by reducing the amount of taxes you pay

Question 8

what happens when accrued compensation goes up by 10$?

assume t = 30%

Answer 8

Accrued compensation: salaries owed, not yet paid

IS: expenses increase by 10 (SG&A expenses), all else equal EBT decrease by 10 and Net Income by 7

CF: Net Income (-7), accrued expenses are a liability that will lower NWC by 10, so CF will increase by 3

BS: cash +3, accrued expenses +10 and equity -7

Question 9

what happens when inventory, paid with cash, goes up by 10$?

Answer 9

IS: no change, expenses show up only when goods associated with them are sold

CF: increase in NWC, decrease of 10 in cash

BS: cash -10, inventory+10

Question 10

how do assets write downs affect the FS

Answer 10

IS: write downs show up as expenses, consider taxes when computing change in net income

CF: Net income down, by we need to add back a non cash expense

BS: cash up, fixed assets down, equity down

Question 11

sell ipods for 20$, paid 10$. How does it affect the financial statements?

tax rate = 30%

Answer 11

IS: +20 revenue, subtract costs, end up with EBT of 10. Net income up by 7.

CF: net income (+7), NWC (+10 because inventory decreased), overall cash +17

BS: Assets +17, inventory -10, equity +7

Question 12

could you ever end up with negative shareholders equity?

Answer 12

yes, in 2 cases:

1. LBOs with dividends recapitalizations - the owner of the company has taken out a large portion of its equity
2. consinstently losing money and big drop in retained earnings

Question 13

WC and NWC

Answer 13

WC = CA - CL
can the company pay its short term obligations with short term assets? does it require further financing=

NWC= (CA - cash) - (current liabilities - debt)

Question 14

what does negative working capital mean?

Answer 14

1. some “subscription based businesses” often have lots of deferred revenue and negative WC
2. retail and restaurant companies have costumers that pay upfront, so they can use cash generated to pay off accounts payable rather than keeping a large cash balance on hand
3. sometimes a sign og financial trouble