pillars of wall street - financial statement analysis - overview

Question 1

FASB

Answer 1

financial accounting standards board; board that sets GAAP accounting rules

Question 2

GAAP

Answer 2

generally accepted accounting principles

Question 3

10K

Answer 3

annual report that all publicly-traded companies in US must issue

Question 4

10Q

Answer 4

US publicly-traded companies must also issue three of three interim reports (called quarterlies) each year

Question 5

IASB

Answer 5

international accounting standards board; board that sets IFRS accounting rules

Question 6

IFRS

Answer 6

international financial reporting standards; different from GAAP but also requires annual and interim reports; however IFRS only requires on interim report (six-month)

Question 7

structuring of annual report

Answer 7

10K and IFRS follow same structure

at top, have MD&A

next, will have income statement, balance sheet and cash flow statement

lastly, has notes - gives explanation of each line item in the three financial statements

Question 8

MD&A

Answer 8

management, discussion and analysis

opportunity to have a sit-down with company management; ceo will tell you how they generate revenue, what opportunities they see moving forward, what headwinds and tailwinds they see; goal is to understand nuts and bolts of company

in summary, it answers the question, “what does this company do?”

Question 9

income statement

Answer 9

talks about revenue earned and expenses incurred over a period of time (like one year for a 10K)

doesn’t tell you anything about cash; only a statement of profitability over time

top line is “sales” or “revenue” or “net interest” for financial companies

this is followed by expenses

bottom will be net income

Question 10

balance sheet

Answer 10

snapshot as of some specific point of time - “as of december 31st, have x cash on balance sheet, have y debt and z shareholder equity”

tells you the assets, liabilities and equity

Question 11

cash flow statement

Answer 11

a reconciliation of two balance sheets applying the rules of cash - helps you see how cash changed over a period of time

Question 12

fundamental accounting equation

Answer 12

assets = liabilities + shareholder equity

liabilities and shareholder equity are the sources of cash

assets are the uses of the cash

so, another identity –> uses = sources –> sources of funding must equal uses of the funding

Question 13

links between three financial statements

Answer 13

the net income figure from the income statement is the top line number in the cash flow statement.

cash flow statement will net income and various add-backs as inputs; the output will be the ending cash figure.

the ending cash figure is the top line number in the balance sheet (falls under current assets sub-heading of the assets category and is often called “cash and cash equivalents”)

the net income figure from the income statement also gets included in the balance sheet as “retained earnings”

Question 14

retained earnings

Answer 14

total undistributed earnings of a company since inception; it is rolling from year to year and is cumulative

when you earn net income over the life of a company, retained earnings increases

however, if the company pays out dividends, it draws the retained earnings balance down