Accounting Flashcards
(14 cards)
What are the main sections of 10k?
Business overview
Management’s discussion and analysis
Financial statements
Notes
Walk me through the 3 financial statements
1) Income statement:
Shows company profitability over a specific period, usually quarterly and annually. Starts with revenue, deducts various costs, ends with net income
2) Balance sheet:
A snapshot of a company’s assets and sources of funding (liabilities and equity) and a certain period of time ‘as of’
3) Cash flow statement:
Represents cash inflows and outflows over a certain period of time.
Starting with net income, then adjusted for non-cash items to get cash from operations, then cash from investing and financing activities are added
Walk me through the income statement
Net revenue
- Cost of goods sold
=Gross profit
-SGnA
-RnD
=EBITDA
-DnA
=Operating income (EBIT)
-Interest expense
=Pre-tax income (EBT)
-Tax expense
=Net income
What are assets, liabilities and equity?
Assets = resources with economic value that cn be sold for money or cam bring positive monetary benefits in the future
Liabilities = Unsettled obligations to another party in the future
Equity = Capital invested in the business representing the internal sources of capital that have helped fund assets
How are the income statement and cash flow statement connected?
Through net income, as net income is the starting line on CFS
How are the CFS and BS connected?
CFS tracks the changes in balance sheet working capital, inpact from CapEx, debt or equity issuances, share buybacks, AND ending cash balance from bottom of CFS will flow to BS as cash balance for current period
How are the IS and BS connected?
Through retained earnings.
Net income - dividends issued will be added to prior period’s reatined earnings to calculate the current periods retained earnings
If you have a BS and have to chose between the IS and CFS, which do you pick?
Assuming we arae given both the beginning and end of period BS, I would chose income statement as I can then produce the CFS
Which of the main 3 statements are more important for analysing a company?
CFS as reflects true liquidity as is not prone to discretionary accounting practises such as accruals.
It shows a company’s ability to generate FCFs, important for any investor
Why is the income statement insufficient to assess the liquidity of a company?
For example, a company could show positive net income yet struggle to collect credit sales
How does depreciation affect net income?
It is treated as non-cash and added back into cash flow statement, HOWEVER the expense is tax deductible and reduces the tax burden
How would a $10 increase in depreciation flow through the financial statements?
IS -> on COGS or Operating expenses, EBIT would increase by $10, assuming 30% tax rate, net income will decline by $7
CFS -> Net income decreased by $7, $10 then added back in as non-cash expense, positive $3 increase on ending cash balance
BS -> PPE decrease by $10, cash up $3, 7$ decrease in assets
Eq + L -> 7 reduction net earnings
If share price increases by 10%, what is the effect on the BS?
No change as equity on BS shows book value of equity, so price at issue
Whats the difference between above the line and below the line?
Above the line: Company’s operational profit before non-operational items such as interest and tax (EBITDA)
Below the line: Profit metrics that have adjusted operating income for non-operating income and expenses
