Integrated Financial Model Study Guide

Period of Time vs. Point in Time

IS and CFS cover a period (quarter/year); BS is a snapshot at a specific date.

Accrual Basis of Accounting

Revenue/expenses are recognized when earned or incurred, regardless of when cash changes hands.

The Accounting Equation

Assets = Liabilities + Shareholders' Equity. Must always stay in balance.

Hardcodes vs. Formulas (Excel Conventions)

Blue: hardcoded input. Black: Excel formula. Green: cross-sheet link.

Top Line vs. Bottom Line

Top Line is Total Revenue; Bottom Line is Net Income after all deductions.

Revenue Mix

Proportion of different revenue streams; recurring service revenue is valued higher than one-time products.

Cost of Goods Sold (COGS)

Direct costs of production (materials, labor); drops to zero if production halts.

Operating Expenses (OPEX)

Overhead costs required to run the entity (rent, salaries) regardless of production volume.

SG&A (Selling, General & Administrative)

Selling: marketing/commissions (scales with revenue). G&A: fixed overhead (HR, legal, executive pay).

R&D Accounting Rule (GAAP)

GAAP mandates R&D be expensed immediately, not capitalized as an asset.

Depreciation & Amortization (D&A)

Non-cash allocation of asset costs. Depreciation: physical assets. Amortization: intangible assets.

Stock-Based Compensation (SBC)

Non-cash employee pay via equity; reduces Net Income but is added back to CFS.

Corporate Tax Shield

Non-cash expenses lower taxable income. Cash Saved = Non-Cash Expense × Effective Tax Rate.

EBIT (Operating Income)

Earnings Before Interest and Taxes; isolates core operating performance from capital/tax choices.

EBITDA

EBIT + D&A; serves as a primary proxy for operational cash flow.

Adjusted EBITDA

EBITDA plus SBC and one-time charges; used to isolate normalized earnings.

Enterprise Value (EV) Multiple

EV / EBITDA; measures how many times operational cash profitability a company trades at.

Diluted Shares Outstanding

Total shares plus all potential shares from options, warrants, or convertible bonds.

"Above the Line" vs. "Below the Line" Split

The Line is EBIT. Above: operational (Revenue, COGS). Below: financing/taxes (Interest, Taxes).

Net Income's Two Destinations

1. Top of Cash Flow Statement. 2. Retained Earnings on the Balance Sheet.

Retained Earnings Roll-Forward Formula

Ending RE = Beginning RE + Net Income - Dividends Paid.

Net Change in Cash Link

Ending Cash = Beginning Cash + Net Change in Cash (from CFS bottom).