Transcript of Accounting Basics: Agenda Introduction to Financial Statements – Balance Sheet – Income...
- Slide 1
- Accounting Basics: Agenda Introduction to Financial Statements
Balance Sheet Income Statement Statement of Cash Flows Metrics and
Ratios
- Slide 2
- Balance Sheet Snapshot of a companys financial standings
Details a companys Assets, Liabilities and Equity Assets: All of
the resources of a company Liabilities: All of the obligations of
the company Stockholders Equity: The equity stake owned by equity
investors. Also referred to as Book Value because it is the value
of the company after all obligations have been paid, at book
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- Balance Sheet Based on the equation Assets = Liabilities +
Stockholders Equity In words: The resources of a company must be
equal to all of the capital that is attributed to the company (i.e.
Debt and Equity) Important Note: Assets, Liabilities and
Stockholders Equity are recorded at historical cost per GAAP rules,
not market value Lets take a look at the left hand of the
equation
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- Listed in order of liquidity how quickly can they be converted
to cash Current assets are those that mature in 1 year or less
Receivables are essentially products or services bought on account
cash hasnt changed hands Tangible vs. Intangible Goodwill is a
common intangible assets. It represents the excess amount paid over
the carrying value of a company acquired, it is impaired not
amortized.
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- Liabilities are listed in order of time to be repaid Accounts
payable represents services or products bought on account have not
yet been paid Current portion of long term debt is the portion of
long term debt that must be paid within 1 year Minority represents
the portion of the company that is not owned
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- Common stock represents the par value of the stock issued by
the company Sometimes there will be an account called additional
paid-in capital to account for the surplus over par value Retained
earnings is the accumulative account that captures all of the
earnings of the company (net income flows into this account)
Treasury stock represents the amount of stock repurchased Preferred
stock is a common type of equity that has higher claim than common
equity, but lower claim than debt. Generally have regular
dividends.
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- Income Statement Income Statement shows the performance of a
business over a given amount of time (i.e. quarter or year) By
definition income is simply Revenue Expenses Revenue is recognized
when it accrues, not when cash trades hands This causes a
discrepancy between income and cash flow There are also non-cash
items on an income statement which are expenses that dont actually
effect cash flow, but do effect the amount of taxes paid This will
be an important concept moving forward
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- Income Statement Cost of Goods sold includes all of the cost
associated with producing the product SG&A is Selling General
& Administrative Expenses Depreciation is how purchases of
fixed assets are expensed non cash expense Amortization is the
depreciation of intangible assets non cash expense EBIT stands for
Earning Before Interest and Taxes
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- Income Statement
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- Statement of Cash Flows Reconciles the amount of money earned
(NI) with the actual cash that the firm generates Very important
because in Finance we focus on cash over earnings because earnings
can be manipulated and cash cannot Breaks cash flows into three
separate segments Cash from Operating Activities Cash provided/used
in the normal operations of the business Cash from Investing
Activities Investing activities refer to investments in capital
assets (PP&E) Cash from Financing Activities Refers to any
transactions between the firm and holders of capital (debt or
equity)
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- Statement of Cash Flows
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- Interview Question How would a purchase of fixed assets worth
$100 effect the three financial statements? Assume straight-line
depreciation over 10 years.
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- Answer Balance Sheet: Cash decreases by 100, Net PP&E
increases by 90, Retained Earnings decreases by 10 Income
Statement: Depreciation increases by $10 and Net Income decreases
by same amount Statement of Cash Flows: Operating Activities: Net
Income decreases by 10, depreciation increases by 10 Net Change in
cash = $0 Investing Activities: Capital Expenditure of $100 Net
Change in cash = $100
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- Metrics and Ratios Solvency: Current Ratio: Current
Assets/Current Liabilities Quick Ratio: Current Assets Inventory /
Current Liabilities Leverage: Debt-to-Equity Ratio: Total Debt /
Total Equity Debt Ratio: Total Debt / Total Assets Times Interest
Earned Ratio (TIE) or EBIT Coverage: EBIT/Int Expense Profitability
Return on Assets: Net Income / Average Assets Return on Equity: Net
Income / Average Equity Gross Margin: Gross Profit / Total Revenue
Net Profit Margin: Net Income / Total Revenue
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- Cash Flows Equations Equations that are used for the DCF Two
Options Free Cash Flow to Firm Free Cash Flow to Equity For our DCF
we use FCF to Equity
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- Components of FCF to Equity Net Income + Depreciation Change in
Net Working Capital Capital Expenditure + Net New Debt Net Income:
We start with levered (i.e. after interest) earnings Depreciation:
We add back Depreciation as it is a non-cash expense Net Working
Capital: Current Assets Current Liabilities. Companies like to
maintain a positive net working capital position and a positive NWC
represents an investment in NWC Capital Expenditure: Change in Net
Fixed Assets. We need to invest in the assets that make our
business profitable every year Net New Debt: Increasing our debt
means we get more cash, which we add back