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Question 1

What is the difference between cash and accrual accounting?

Answer 1

Cash

Revenues and expenses are recognized when cash is received or disbursed.

Accrual

Revenues and expenses are recognized in advance of cash receipt or disbursement

Question 2

When building a model, what is the most common way to project AR, AP, Inventory, Depreciation, and CapEx?

Answer 2

AR= % of revenues or days sales outstanding

AP= % of COGS or days payable outstanding

Inventory= % of COGS

Depreciation= % of prior year’s PP&E or calculated at the individual asset level using different schedules, etc

CapEx= % of revenues or from company guidance

Question 3

What would be the effect of using levered free cash flow rather than unlevered free cash flow in your DCF model?

Answer 3

The FCF formula is unlevered because it is EBIT, meaning interest has not been paid and the effects of debt are not included. If you were to lever FCF, you would be calculating the amount available to equity holders.

Question 4

What is the difference between LIFO and FIFO?

Answer 4

LIFO

Last in, first out. The company assigns the most recent cost to COGS.

For example, if a company bought 5 widgets for $5 and then 5 widgets for $10, the first 5 widgets sold would increase COGS and reduce inventory by $10 each, and then the last 5 widgets would increase COGS and decrease inventory by $5 each.

FIFO

First in, first out. Assignment to COGS and inventory based on what came in first.