Analyzing Financial Statements 1-3

What accounting basis does the Income Statement use?

Accrual-based accounting

What does the Income Statement measure?

A company's day-to-day operating performance and economic earnings over a defined period

What time period can an Income Statement cover?

A defined period such as 90 days or 1 year

What does the Income Statement show about economic performance?

Whether the business is profitable on an economic basis

What is the basic formula for Net Income?

Revenue - Expenses = Net Income

What does the Income Statement reveal about growth investments?

How much the company invests in operating expenses to drive future revenue growth

What operating expenses can drive future revenue growth?

Sales, General & Administrative (SG&A) and Research & Development (R&D)

What does SG&A stand for?

Sales, General & Administrative

What does R&D stand for?

Research & Development

What does the Income Statement show about operating profitability?

Gross margins, operating income (EBIT), interest expenses, and net profit margins

What does the Income Statement NOT track?

Actual cash inflows and outflows

What directly influences reported Income Statement results?

Management estimates

What is a limitation of the Income Statement's time period?

It shows results for only a single period rather than a cumulative historical picture

What is the core purpose of the Balance Sheet?

To provide a point-in-time snapshot of a company's financial position

When does the Balance Sheet measure financial position?

On a specific date

What is the Balance Sheet equation?

Assets - Liabilities = Shareholders' Equity

What does the Balance Sheet measure about financial strength?

The overall cumulative financial strength of the business built across its entire history

What does the Balance Sheet show about asset liquidity and quality?

How much of the company's assets are highly liquid versus illiquid

What is the typical conversion period for highly liquid assets?

Less than 12 months

What are examples of highly liquid assets?

Cash and Accounts Receivable

What is the typical conversion period for illiquid assets?

More than 12 months

What are examples of illiquid assets?

PP&E and Goodwill

What does the Balance Sheet show about debt risk?

How much long-term debt and short-term obligations the company owes

How are assets recorded on the Balance Sheet?

At historical cost rather than current fair market value

What important intangible factors can the Balance Sheet omit?

Management team quality and brand strength

How can Goodwill affect total asset figures?

Goodwill can inflate total asset figures

What does the Balance Sheet NOT show about recent performance?

Recent trends in economic performance or cash flow

What is the core purpose of the Statement of Cash Flows?

To provide a detailed roadmap of actual cash inflows and outflows over a specific period

Does the Statement of Cash Flows use accrual accounting?

No, it tracks actual cash flows

Does the Statement of Cash Flows rely on management estimates?

No

What are the three sections of the Statement of Cash Flows?

Operating, Investing, and Financing activities

What does Operating Cash Flow show?

Cash generated from core business operations

How is Operating Cash Flow calculated from Net Income?

Start with Net Income, add non-cash expenses, and adjust for changes in Net Working Capital

What non-cash expenses are added back in Operating Cash Flow?

Depreciation and Stock Compensation

Why is Depreciation added back in Operating Cash Flow?

Because it is a non-cash expense

Why is Stock Compensation added back in Operating Cash Flow?

Because it is a non-cash expense

What does Operating Cash Flow adjust for besides non-cash expenses?

Changes in Net Working Capital

What Net Working Capital accounts affect Operating Cash Flow?

Accounts Receivable, Inventory, and Accounts Payable

What does Investing Cash Flow show?

Cash used for capital expenditures and M&A transactions

What does CapEx stand for?

Capital expenditures

What does CapEx typically involve?

Purchasing PP&E

What does M&A stand for?

Mergers and acquisitions

What does Financing Cash Flow show?

Cash raised or used through financing activities

What debt activities are included in Financing Cash Flow?

Debt issuances and loan repayments

What equity activities are included in Financing Cash Flow?

Share repurchases and dividend payments

Who receives dividend payments?

Equity holders

What does Net Change in Cash represent?

The overall change in cash during the period

Where does the ending cash balance tie on the Balance Sheet?

The Cash line item

Why can cash flows over a short period be misleading?

They can be volatile over 90 or 365 days

What may short-term cash flows not reflect?

Underlying long-term economic performance

Which financial statement measures economic earnings?

The Income Statement

Which financial statement provides a point-in-time snapshot?

The Balance Sheet

Which financial statement tracks actual cash inflows and outflows?

The Statement of Cash Flows

Which financial statement uses accrual-based accounting?

The Income Statement

Which financial statement shows cumulative financial strength?

The Balance Sheet

Which financial statement has Operating, Investing, and Financing sections?

The Statement of Cash Flows

What does the Income Statement measure?

Economic operating performance over a period using accrual accounting.

What is the Income Statement equation?

Revenue - Expenses = Net Income.

What is the main limitation of the Income Statement?

It does not show actual cash generated and relies on accounting estimates.

Give two examples of non-cash expenses.

Depreciation and stock-based compensation.

What does the Balance Sheet show?

A snapshot of a company's financial position at a specific point in time.

What is the Balance Sheet equation?

Assets = Liabilities + Shareholders' Equity.

What is the main limitation of the Balance Sheet?

Assets are recorded at historical cost and important intangibles are excluded.

What important intangible assets are not shown on the Balance Sheet?

Management quality and brand strength.

What does the Statement of Cash Flows show?

Every actual cash dollar entering and leaving the business.

What are the three sections of the Statement of Cash Flows?

Operating, Investing, and Financing.

Where does Net Income flow after the Income Statement?

It becomes the starting point for Operating Cash Flow.

Where else does Net Income flow besides the SoCF?

Retained Earnings on the Balance Sheet.

How do dividends affect Retained Earnings?

Net Income minus dividends increases Retained Earnings.

What Balance Sheet account must equal the Ending Cash Balance on the SoCF?

Cash and Cash Equivalents.

How are working capital changes used on the SoCF?

They adjust Net Income to determine actual operating cash flow.

Which Balance Sheet accounts are used for working capital adjustments?

Accounts Receivable, Inventory, and Accounts Payable.

How does CapEx appear on the financial statements?

It is an investing cash outflow and increases PP&E on the Balance Sheet.

How does borrowing affect the financial statements?

It creates financing cash inflows and increases debt on the Balance Sheet.

How does paying off debt affect the financial statements?

It creates financing cash outflows and reduces debt on the Balance Sheet.

Does revenue growth always mean profit growth?

No, revenue can grow while profits decline.

Why can profits fall even when revenue increases?

Operating expenses can grow faster than gross margin.

What happened to HNI's revenue from 2024 to 2025?

Revenue increased by $312.6 million, or 12.4%.

Why did HNI's EBIT decline despite higher revenue?

Operating expenses increased faster than gross margin.

What does EBIT measure?

Core operating profitability.

Do interest expense and taxes affect EBIT?

No, they affect Net Income but not EBIT.

What is goodwill?

An intangible asset created when a company pays more than fair value in an acquisition.

Is goodwill amortized or depreciated automatically?

No, it is tested annually for impairment.

Why do analysts exclude goodwill in some debt analyses?

Goodwill cannot easily be sold to repay debt.

What ratio is commonly recalculated without goodwill?

Debt-to-Assets excluding Goodwill.

What happens to the Balance Sheet when a debt-financed acquisition occurs?

Assets and liabilities both increase significantly.

When can Shareholders' Equity increase during an acquisition?

When acquired assets exceed assumed liabilities.

Can a company report positive Net Income but negative cash flow?

Yes.

What is the main reason Net Income and cash flow can differ?

Accrual accounting versus actual cash movement.

What working capital items can drain cash despite positive Net Income?

Growing Accounts Receivable and Inventory.

How can CapEx create a disconnect between Net Income and cash flow?

It requires cash but is not immediately expensed on the Income Statement.

What is the primary focus of the Income Statement?

Operating performance over a period.

What is the primary focus of the Balance Sheet?

Financial position at a specific date.

What is the primary focus of the Statement of Cash Flows?

Actual cash received and paid.

What accounting basis does the Income Statement use?

Accrual accounting.

What accounting basis does the Balance Sheet use?

Accrual accounting.

What accounting basis does the Statement of Cash Flows use?

Cash basis.