Income Statements Review
What is an income statement?
A statement of how much a company has earned
What is a Balance Sheet?
How much the company owns
What are operating activities
Core business operations
What is PPE?
Property, Plant, and Equipment
What does the Cash flow Statement ignore
Non-Cash expenses
What is interest expense?
The cost of borrowing money
What is the Balance Sheet formula? What does it tell us on why a balance sheet is called a balance sheet?
Assets = Liabilities + Shareholders' Equity
Assets should balance with liabilities and shareholders' equity
What is deferred tax
Taxes to be paid in the future
What is another term for purchase of business?
Acquisitions
What is the direct method of calculating Cash flow
Use receipts and input values
What is the difference between revenue and net income?
Net income is profit after expenses, revenue is the gross amount earned before expenses
What are Accounts Receivable?
Revenue still to be collected from customers (unpaid invoices, sales made on credit)
Is depreciation/amortization added or subtracted? Why?
It is added as it is a non-cash expense, but recorded as an expense on the income statement for tax purposes.
What is CAPEX?
Capital expenditures, money spent on PPE
What is most commonly used as the first line item to calculate operating cash flow?
Net Income
What is EBIT?
Earnings before interest, taxes
What is capital structure?
The combination of debt and equity used by a company to finance its overall operations and growth
A company makes $1,000 in unrealized gains on an investment security. Is that amount added/subtracted from cash flow and why?
Thet amount is subtracted from cash flow as cash flow takes the net income from the income statement and unrealized gains are recorded on the income statement as a profit, despite no cash being involved.
What's the difference between investing and financing activities?
Investing = Investment into business (PPE or stock)
Finance = Cash related to activities that finance that investment
What does FCF tell you?
FCF informs you of the company’s ability to run its operations while maintaining CAPEX and how much cash is left over
What is the difference between Depreciation and Amortization?
Depreciation is the expense of tangible assets over useful life (machinery, equipment, buildings, vehicles), while amortization is the expense of intangible assets over its useful life (patents, trademarks, licenses)
What is Goodwill?
An intangible asset that tries to quantify the additional value added to the business through customer loyalty, brand reputation, and other non-quantifiable assets
What does working capital tell you? What is the formula?
Cash tied up in a business' operations.
WC = AR+Inventory-Accounts Payable
What is another term for Repurchase of Common Stock? How does it benefit shareholders?
Buybacks
Benefits shareholders by reducing shares outstanding, thereby lowering supply, artificially increasing price, and increasing existing shareholders' equity stake in the company.
What is tax shield on interest?
Tells us cash tax savings from using debt (Levered Current Taxes - Unlevered Current Taxes)