Understanding Financial Information Flashcards
What is the balance sheet?
The balance sheet is a financial snapshot at a point in time, showing what the business owns (assets) and owes (liabilities)
If there are more assets than liabilities, the balance belongs to the shareholders and is called equity
You’ll normally see 2 balance sheets – a snapshot at the beginning of the year and another at the end of the year
Between the 2 snapshots (i.e. during the year), things happen - these events are captured in the income statement and cash flow statement.
What is the income statement?
What is it’s other name?
The income statement (P&L) shows what happened in terms of EARNED income and INCURRED expenses (i.e. regardless of whether or not the money was received or paid).
What is the cash flow statement?
The cash flow statement shows what happened in terms of RECEIVED income and PAID expenses (i.e. regardless of whether the money was earned in the year).
Give four possible words for revenue.
1) Revenue
2) Sales
3) Turnover
4) Top line
Give four possible words for profit.
1) Profit
2) Earnings
3) Income
4) Bottom Line
Give four possible words for operating profit.
1) EBIT (earnings before interest & tax)
2) PBIT
3) Operating income
4) Trading profit
Give three possible words for profit before tax.
1) PBT/EBT
2) Pre-tax profit
3) Income before tax
Give five possible words for net profit.
1) Earnings
2) Profit after tax
3) Attributable profit
4) Net income
5) Bottom line
How would you assess how well a company is doing from the income statement?
1) Look at revenue growth - how does this compare to the increase in cost of sales.
2) Has opex increased? - If so, in what areas?
3) Has EBIT increased?
4) Has EBIT Margin Increased?
How would you calculate EBIT margin?
Operating Profit (EBIT) / Revenue
How would you calculate EBITDA from a company’s income statement?
EBIT + Depreciation.
What is the income statement useful in showing?
The income statement (P&L) shows how revenue earned less expenses incurred makes profits/losses
It shows various levels of profit with operating profit (EBIT) most useful to assess operational performance
When is EBITDA useful?
EBITDA is useful when comparing businesses with different depreciation rates and is a proxy for ‘cash’ operating profit.
What are the two key drivers of profits?
Which has the biggest impact?
Price reductions have the biggest impact on profits – they fall straight through to profit £ for £ (unless you can cut costs quickly)
When volume falls, cost of sales falls too – so there’s less impact on profits
What are the two sources of capital?
Capital comes from equity and debt
In what two ways can capital be spent?
Capital is spent on capex and working capital (assets) and opex (expenses)
Capital expenditure can be large and lumpy and can be a major use of cash
What is the main effect of depreciation?
Long-term assets are depreciated (affecting profits but not cash flows).
What is working capital?
Working capital (inventories, + receivables – payables) control is crucial – it helps convert profits into cash.
What is bad debt?
Bad debts (a receivable not paying) are disastrous – the full sales amount comes off profit.
How does profit not paid out in dividends affect the balance sheet?
Profits not paid out by way of dividends are retained and reinvested on the shareholders’ behalf (i.e. they increase the equity).
What is a balance sheet?
Balance sheet shows what’s owned and owed at a moment in time
Assets = liabilities + equity (or assets – liabilities = equity)
Capex spend appears as a long term (non-current) asset
Tangible assets are depreciated and intangible assets are amortised though the income statement
Not a valuation statement - there is often hidden value in properties at historic cost & ‘investment’ in marketing, R&D etc through the P
What is an income statement?
Income statement (P&L) shows how revenue earned less expenses incurred makes profits/losses
Shows various levels of profit with operating profit (EBIT) most useful to assess operational performance
EBITDA is useful when comparing businesses with different deprecation rates and is a proxy for ‘cash’ operating profit
What is a cash flow statement?
Cash flows show cash in and cash out
Profits & cash flows differ because of D&A, capex timing and cash tied up/released from changes in working capital
Name and define what typically appears on a balance sheet under assets? (4)
1) Goodwill and other intangibles - Most of these arise whena company makes an acquisition (brands, customer relationships, patents, licenses & goodwill)
2) PP&E - Property, plant & equipment, factories, offices, vehicles etc
3) Inventories - Stock of goods to be sold (may include work-in-progress).
4) Receivables - Money owed to the business by customers.
Name and define what typically appears on a balance sheet under liabilities? (4)
1) Payables - Money owed to suppliers.
2) Short-term debt and Long-term debt - loans from banks and bond issues.
3) Long term liabilities - could include legal and environmental liabilities, pensions and post-retirement healthcare and long-term tax.
4) Equity - shareholders capital and retained profits.
