Summer Techs (W1)

Walk me through the income statement.

Income statement represents profit and losses over a period of time:

Revenue/Sales

Minus CoGS (Cost of Goods Sold)

Minus Operating Expenses (SG&A, R&D…)

This gets you to operating income

Account for other income or expenses (ex: interest income/expense)

This gets you to Profit Before Tax (PBT)

Minus Taxes

Net Income

Walk me through the Balance Sheet

1. Balance Sheet measures financial health at a period in time:

2. Current Assets (Cash, Inventory, Accounts Receivable, etc)

3. Long-Term Assets (PP&E, Goodwill, Intangibles, etc)

4. Current Liabilities (Accounts Payable, Deferred Revenue, etc)

5. Long-Term Liabilities (Long-Term Debt, etc)

6. Stockholder’s Equity (Retained Earnings, Common Stock, etc)

7. ASSETS = LIABILITIES + STOCKHOLDER’S EQUITY

Walk me through the Cash Flow Statement

CFS measures cash in and out the door during a period of time:

Starts with Net Income

Add back non-cash operating expenses and account for changes in net working capital to arrive at Cash Flow from Operations (CFO)

Then we move to Cash Flow from Investing Activities (CFI) which includes CAPEX or sale of equipment or investments

Lastly we move to Cash Flow from Financing Activities (CFF), which involves issuing or repaying debt/equity and paying dividends

Sum these up to get net change in cash, add net change in cash to beginning cash balance to get ending cash balance

Walk me through how the three financial statements connect.

Net Income from the Income Statement flows to the top of the Cash Flow Statement and to retained earnings on the Balance Sheet. Changes to current assets and liabilities on the balance sheet are reflected as changes in working capital on the CFS. Investing and financing activities on the CFS, such as CapEx or debt issuing and repayment affect balance sheet items like PP&E, debt balances, and shareholder’s equity. Ending cash balance on the CFS flows to the cash line on the Balance Sheet.

If you only had one financial statement to evaluate a company which would it be?

It would be the Cash Flow Statement because it provides a clear view of the company’s cash inflows and outflows, which are crucial for assessing the financial health of the company.

If you had two statements, which would it be?

The Income Statement and the Balance Sheet because with those you can craft the CFS.

Walk me through how a $10 increase in depreciation expense affects the three financial statements. Assume a 20% Tax Rate. 

Income Statement: Depreciation reduces Earnings Before Tax by $10. After Taxes, Net Income will be down $8.

Cash Flow Statement: Add back the full $10 because depreciation is a non-cash expense, so cash will be up by $2

(Remember that Net Income starts off the CFS, and the depreciation add-back will take place in the CFO section)

Balance Sheet: Cash up $2, PP&E down $10 (because depreciation decreases the value of PP&E), assets down $8. Finally, Net Income flows to retained earnings, so stockholder’s equity is down $8, and the balance sheet balances.

What is EBITDA and why is it used?

Earnings Before Interest, Taxes, Depreciation, and Amortization is commonly used because it is a good representation of a company’s actual operations as it removes line items that don’t directly affect a company’s operations.

If a company raises $100 of debt (and doesn’t purchase anything), how does that immediately affect the three statements?

If a company raises $100 of debt (and doesn’t purchase anything), how does that immediately affect the three statements?

1. Income Statement: No immediate Impact

2. Cash Flow Statement: CFF up $100, Cash up $100

3. Balance Sheet: Cash up $100, Debt up $100, balance sheet balances

Walk me through how a $10 increase in deferred revenue affects the three statement

1. Income Statement: No immediate impact

2. Cash Flow Statement: Liabilities increase, so CFO and cash will be up $10

3. Balance Sheet: Cash up $10, Deferred Revenue (Current Liability) up $10, balance sheet balances