400 finance questions

Walk me through the 3 financial statements.

Walk me through the 3 financial statements.

PL - rev & exp → net income
BS - Assets = rss - Cash, Inv, PP&E - Lia = Debt, E always balanced
CFS - ops, inv, fin - start net income → change in cash

Can you give examples of major line items on each of the financial statements?

Income Statement: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Net Income

Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt; Shareholders’ Equity.

Cash Flow Statement: Net Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow From Financing.

How do the 3 statements link together?

Net income → Equity & top CFS
Changes BS → change in woking cap CFS

CGS fin & inv → BS (Equity, Debt, PP&E)
Cash - CFS

If I were stranded on a desert island, only had 1 statement and I wanted to review the overall health of a company – which statement would I use and why?

CFS - cash generated - #1 thing to care about

Let’s say I could only look at 2 statements to assess a company’s prospects – which 2 would I use and why?

PL & BS allow creating CFS

Walk me through how Depreciation going up by $10 would affect the statements.

PL. -10 Op Inc (tax eff) -6 Net Inc

BS. Asset - -10 D&A +4 Cash

Liabilities - -6 Net Inc

CFS. -6 Net Inc +10 D&A → +4

If Depreciation is a non-cash expense, why does it affect the cash balance?

Tax-deductible. taxes → cash expense, Depreciation affects cash by reducing the amount of taxes you pay.

What happens when Accrued Compensation goes up by $10?

PL. -10 Op Inc (tax eff) -6 Net Inc (increase in Opex)

BS. Asset - +4 Cash

Liabilities - +10 Lia -6 Net Inc

CFS. -6 Net Inc +10 Accrued compensation A → +4

Where does Depreciation usually show up on the Income Statement?

COGS or Operating Expenses

→ Reduces the Pre-Tax Income

What happens when Inventory goes up by $10, assuming you pay for it with cash?

-10 cash +10 Inv (BS only)

Why is the Income Statement not affected by changes in Inventory?

It does not count as a Cost of Good Sold or Operating Expense until the company manufactures it into a product and sells it.

A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?

Too much CAPEX - not in EBITDA

Too high Int Exp

Credit Crunch - debt all mature on one date

Significant 1 time payment (eg litigation)

What is a credit crunch?

A credit crunch refers to a decline in lending activity by financial institutions brought on by a sudden shortage of funds.
Often an extension of a recession, a credit crunch makes it nearly impossible for companies to borrow because lenders are scared of bankruptcies or defaults, resulting in higher rates.

Normally Goodwill remains constant on the Balance Sheet – why would it be impaired and what does Goodwill Impairment mean?

reassesment of Int A for a Acquisition for ex (overpayment)
Value calculated is lower than price paid

Under what circumstances would Goodwill increase?

Technically - reass and find higer value (rare)

Realistically

1 - comapny acquired or bought out → GW changes

2 - Company pays more than assets of the target are worth → reflect in GW

Could you ever end up with negative shareholders’ equity? What does it mean?

Share price cannot be negative.

However, cumulative negative net income cumulating in the reserves it might become higher than the rest of the items.

Or with a dividend recap, there might be a large portion of the equity taken out (in cash)

What is Working Capital?

WC = Current A - Current L