3-statement modeling Flashcards
(50 cards)
What is the core purpose of a 3‑statement financial model?
To integrate the income statement, balance sheet, and cash‑flow statement so that they dynamically balance and reflect a company’s financial health.
List five learning objectives highlighted by the course.
1) Follow a clear modeling framework,
2) Divide the model into schedules,
3) Use a consistent schedule layout,
4) Calculate key outputs,
5) Review and maintain a schedule library.
Why does the course compare a company health check to a regular medical check‑up?
Both involve collecting key metrics (revenues, cash flow, assets, costs) to assess overall health and detect issues early.
Which three core financial statements are linked in a 3‑statement model?
Income Statement, Cash Flow Statement, and Balance Sheet.
State the main goal of each statement in one phrase.
Income Statement: measure profitability; Cash Flow Statement: track cash management; Balance Sheet: review assets and how they’re financed.
Which statements show a period of time and which show a point in time?
Income and Cash‑Flow Statements cover a period; the Balance Sheet is a point‑in‑time snapshot.
What order of preparation does the course recommend for the 3 statements?
1) Complete Income Statement,
2) Complete Cash Flow Statement (using net income),
3) Complete Balance Sheet (using ending cash).
List six tasks finance professionals must perform when building a 3‑statement model.
Prepare reports, add supporting schedules, link statements, review for integrity, confirm balances, and set up presentation/printing.
Why does the instructor advocate ‘reverse model design’?
Starting with desired outputs ensures the model meets audience needs and contains the right level of detail before building inputs.
Give the preferred model layout layers (top to bottom).
Cover Page → Dashboard (Outputs) → Drivers (Key Inputs) → Model (Operational & Capital Schedules) → Appendix (Structure).
What two critical qualities must financial models balance, according to the course?
Decision‑making power and clear communication.
How are ‘model drivers’ defined?
Volatile assumptions that significantly impact outputs and merit scenario testing.
Why should drivers be isolated from other inputs?
To facilitate sensitivity analysis and prevent accidental changes to non‑drivers.
List six operational schedules identified in the course.
- Revenue,
- Cost,
- Working Capital,
- Depreciation,
- Asset (PP&E), and
- Income Tax schedules.
Why are operational schedules built before capital‑structure schedules?
Because operating performance drives cash flows that determine financing needs.
Define capital structure.
The mix of debt and equity a company uses to finance its operations and assets.
Why is debt often cheaper than equity?
Interest is tax‑deductible and lenders bear lower risk due to senior claims.
What is a ‘corkscrew’ schedule?
A roll‑forward table (beginning balance + additions – reductions = ending balance) used to track debt or equity balances over time.
Which three line‑items commonly appear in a term‑debt corkscrew?
Beginning balance, increase/(decrease), and ending balance (with interest rate & expense below).
What ordering rule is suggested for debt and equity schedules?
Follow seniority—senior debt first, then subordinated debt, then equity.
How does the balance‑sheet equation act as an error check?
If Assets ≠ Liabilities + Equity, the model signals an imbalance that must be fixed.
Why is it discouraged to force links that always balance the sheet?
Automatic balancing can mask underlying errors; an imbalance is a helpful red flag.
What Excel option allows circular calculations?
Enable iterative calculation under File/Options → Formulas.
Name two common circularity loops highlighted.
Net‑interest loop (cash ↔ income statement) and revolver loop (cash ↔ debt).
