QAD Technical 2 Flashcards
If you had to pick one statement to look at, which one would it be an why?
Statement of cash flows. Cash is king and the cash flow statement allows observing important performance metrics from the IS and BS (net income, depreciation, sources and uses of funds).
Walk me through the 3 Financial Statements.
The balance sheet shows a company’s assets, its liabilities and shareholders’ equity. The income statement outlines the company’s revenues and expenses. The cash flow statement shows the cash flows from operating, investing and financing activities.
What is the Statement of Cash Flows?
The cash flow statement showcase the cash generated and used during a given period of time. The various activities that are involved the Cash Flow statement are:
Operating activities – business activities accounting to cash
Investing activities – sale and purchase of equipment or property
Financial activities- purchase of stock and own bonds
Supplemental information- exchange of significant items that don’t involve cash
If you could only have two of the three main financial statements, which would it be?
The balance sheet and income statement because as long as I have the balance sheet from the beginning and end of the period as well as the end of period income statement, I would be able to generate a statement of cash flows.
How is the income statement linked to the balance sheet?
Net income flows into retained earnings.
What are some potential reasons that a company might acquire another company?
Revenue and Cost Synergies
Upselling/Cross-Selling Opportunities
Proprietary Assets Ownership (Intellectual Property, Patents, Copyright)
Expanded Geographic Reach and Customers
Revenue Diversification and Less Risk
Horizontal Integration (i.e. Market Leadership and Less Competition)
Vertical Integration (i.e. Supply Chain Efficiencies)
How do you model revenues for a company?
There are three common ways to forecast revenues: bottom-up, top-down, and year-over-year.
A bottom-up approach to financial modeling involves starting with individual products/services, estimating average prices/fees per product or service and then growth rates.
A top-down approach involves starting with the overall market size, estimating a company’s market share, and then translating that into revenue
A year-over-year approach involves taking last year’s revenue and increasing it or decreasing it by a certain percentage.
How do you model operating expenses for a company?
You can do a bottom-up build, however, typically, operating expenses move in line with revenues.
As a result, many models forecast operating expenses as a percent of revenues. It’s important to separate fixed and variable costs and model them appropriately. Fixed costs should only change in steps (as required), whereas variable costs will be a direct function of revenue.
How do you build a Financial Model?
A financial model can be as complex or as simple as you need it to be.
I try to tailor my models to the audience so they are fully understood.
I also build my models so they are comprised of smaller, simpler modules. I do this for a couple of reasons:
The smaller modules are easier to explain
I can run a scenario/sensitivity analysis on a specific aspect of the finances (debt, long-term items, ect. )
How Do the Financial Statements link together?
To tie the statements together, Net Income from the Income Statement flows into Shareholders’ Equity on the Balance Sheet, and into the top line of the Cash Flow Statement.
Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such as PP&E, Debt and Shareholders’ Equity
The Cash and Shareholders’ Equity items on the Balance Sheet act as “plugs,” with Cash flowing in from the final line on the Cash Flow Statement.
What makes a good financial model?
Flexibility: Every financial model should be flexible in its scope and adaptable in every situation. It should be easy to modify if necessary.
Financial models shouldn’t be cluttered with excessive details, but they should reflect reality.
Structure: The logical integrity of a financial model is of utter importance. Because many people may use the model, the structure should be rigorous, and integrity should be kept at the forefront.
The model should be as simple as possible and easy to communicate (instructions, charts, and summaries). All assumptions should be documented.
What is working capital, and how do you forecast it?
Working Capital is current assets minus current liabilities.
Essentially, WC is the difference between how much cash is tied up in inventories and AR and how much is need for short-term obligations.
Forecasting working capital involves forecasting Receivables, Inventory, and payables. Typically, cash and debt are not included.
What is Sensitivity Analysis in Financial Modeling?
Sensitivity analysis helps one understand how a target variable is affected by the change in the input variable. For example, if you want to see how the revenue of a company is affected by its customer size, you would set up a sensitivity analysis.
How do you forecast Costs?
You can forecast costs a couple of ways:
Percentage of Revenues - This is probably the simplest way to do it, but it doesn’t provide insight into things like fixed costs.
Variable Costs base on Revenue and Fixed costs based on historical trends.
How would you model working capital?
The three crucial components of working capital are:
inventories
account receivables
accounts payables.
These three aspects are used to find out about the cost of sales, revenues, payments made, etc.
By calculating the days of inventory, the day’s sales outstanding, and the days payable outstanding, you would be able to understand the whole cash conversion cycle.
