things I forget

what three things lead to deferred taxes?

SBC, write-downs/impairments, D&A

is preferred stock tax deductible or no? where does it go on the income statement (like explain the mechanics to me)

preferred stock does NOT affect taxes. it pays out dividends and creates net income to common

how do DTAs/DTLs affect the statements?

1) add DTL and subtract DTA on CFS

• you determine the value by tax rate * NOL?

• or like the way I think it is like the number actually used IRL * the tax rate

2) on BS, asset (DTA) or liabilities (DTL) up (by same amount you add/subtracted on CFS)

what is a capital gain? how is it realized on the financial statements?

a capital gain is when you pay less for a company’s net assets-liabilities. it is realized as (1) a GAIN on the income statement that (2) then has to be subtracted on CFS

what is the difference between equities and liabilities?

both represent a future obligation but equity is tied to a company’s internal operations (ie. for equity investors to realize a gain the company has to operate more efficiently and do better such that their stock price goes up) while liabilities is related to external parties (ie. debt investors just care about getting their money back)

what is common shareholder’s equity?

CSE is equity attributable to all common shareholders. it encapsulates all the equity portions that are attributable to common but nothing more senior (like if they have preferred equity investors, they are more senior and CSE doesnt encapsulate preferred equity)

CSE = common stock + APIC + RE - treasury stock

what are NOLs?

NOLs are a component of a DTA. if you have $100 in NOLs and 25% tax rate, the DTA line item you subtract is $25

what are the differences between accrued expenses and accounts payable?

accrued expenses is recurring (ie. wages) and accounts payable is not (ie. paying suppliers).

accounts payable also has an invoice

how does PIK show up on the financial statements?

IS —> interest expense

CFS —> add back

BS —> debt

what is the difference between the level of working capital vs change in working capital?

level of working capital = current assets - current liabilities

change in working capital = old working capital - new working capital

what does a negative change in working capital mean? what does a positive one mean?

negative = working capital increased, cash outflow bc it USED cash to do grow, company tied up cash

• assets increased more than liabilities

• ie. retailer stocking up for holidays —> buying lots of inventory —> money tied up in that inventory —> so working capital increases —> cash outflow

positive = working capital decreased, cash inflow bc it GAINED cash to do that, company freed cash

• liabilities grew more than assets

• ie. retailer delays paying suppliers —> A/P increases —> more liabilities —> working capital decreases —> cash freed up —> cash inflow

name 7 ways the financial statements connect

NI, D&A, equity, debt, working capital, PIK, CapEx

• Net income → income statement, balance sheet (retained earnings), cash flow statement

• D&A → income statement, add back on CFS, accumulated depreciation on BS

• CapEx → in CFI on CFS, also reflected on BS 

• Debt → in CFF on CFS, on BS under liabilities 

• Equity → in CFF on CFS, on BS as equity

• PIK interest → interest expense on income statement, add back on CFS, debt up on BS

• Working capital → sometimes reflected on income statement, adjusted on CFS, up on BS

what happens when NOLs are used?

add back DTA on CFS, DTA down on BS

• because remember DTAs can be carried on into the future once a company does turn profitable