Module 1: Business Models and Accounting Foundations

What do I mean by a company’s business model?

How it makes money: what it sells, who buys it, and its main revenue and costs.

What are the first things I’d learn about an unfamiliar company?

What it sells, who its customers are, and what drives sales and costs.

What are two basic drivers of sales revenue?

How much the company sells and the average price it charges.

A retailer sells more items at the same price. What happens to revenue?

Revenue rises because sales volume increased.

A company raises prices, but sells fewer units. Must revenue fall?

No. It depends on whether the higher price offsets the lower volume.

What’s the difference between revenue and profit?

Revenue is sales earned. Profit is what remains after expenses.

What’s a fixed cost?

A cost that stays roughly the same as sales change, at least in the short term.

What’s a variable cost?

A cost that changes with activity, like materials used for each unit sold.

Why do competitors matter to a company’s profitability?

They can limit pricing power or take customers, putting pressure on sales and margins.

Why should a credit investor understand the business model?

It helps me judge how dependable earnings and cash flow may be when debt payments come due.

What does an income statement show?

Revenue, expenses, and profit over a period, like a year or quarter.

What does a balance sheet show?

What a company owns, owes, and its equity on a specific date.

What does a cash flow statement show?

Cash coming in and going out from operations, investing, and financing.

A company borrows $10M from a bank. Is that revenue?

No. Borrowing increases cash and debt, not sales or operating profit.

A company reports a profit, but its cash falls. Where do you look first?

The cash flow statement. It shows operating, investing, and financing cash movements.

What’s an asset?

Something the company owns or controls that can provide economic value.

What’s a liability?

An amount the company owes, such as debt or unpaid bills.

What does shareholders’ equity mean on a balance sheet?

The book value left after subtracting liabilities from assets.

What is the basic balance sheet equation?

Assets = Liabilities + Shareholders’ Equity.

What are the three sections of the cash flow statement?

Operating, investing, and financing activities.

Can a company report profit without receiving all the cash?

Yes. It may record a sale before the customer pays.

How do the financial statements connect at a basic level?

Profit affects equity, while cash flows help explain changes in cash on the balance sheet.

Where do I look for a company’s annual revenue?

The income statement, often labeled revenue, net sales, or total sales.

Where do I look for gross profit?

On the income statement, or calculate revenue minus direct costs.

Where do I look for the cash balance?

The balance sheet, usually cash and cash equivalents; check for restrictions.

Where do I look for outstanding borrowings?

The balance sheet’s current and long-term debt lines, then the debt notes.

Where do I find operating cash flow?

The operating activities section of the cash flow statement.

Where might capital expenditures appear?

In investing cash flows as purchases of property, plant, and equipment.

A statement says “$ in thousands” and reports 12,500. What is that?

$12.5 million. The displayed number represents thousands of dollars.

Why check dates and periods before comparing figures?

A full year, a quarter, and a balance-sheet date aren’t interchangeable.

Revenue rises from $100M to $120M. What’s growth?

20%. The increase is $20M, divided by the original $100M.

Revenue is $100M and direct costs are $70M. Gross profit?

$30M. Gross profit is revenue minus direct costs.

Gross profit is $30M on $100M revenue. Gross margin?

30%. Divide gross profit by revenue.

Gross profit dollars rise. Must gross margin also rise?

No. Margin can fall if revenue grows faster than gross profit.

Revenue grew this year. What should I ask before calling that good news?

Did profit and cash improve too, and was the growth from the existing business or an acquisition?