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Cards In This Set
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How do the 3 main accounting FS relate?
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- profits on IS get added to RE on BS
- NI from IS is starting point of SCF
- total change in cash on SCF for a period = change in cash on BS for same period
- debt on BS is used to calculate interest expense on the IS
- cash flow from ops is derived using changes in BS accounts
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What line item is usually found on all 3 FS?
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Net Income (NI)
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Differences between BS, IS, and SCF?
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- BS describes a firm's status at snapshot. IS reps operating results over a period.
- BS tells economic resources that creditors and shareholders can claim. IS sums a businesses profitability withing time period.
- SCF gives more accurate info about certain cash flows than can be inferred from IS and BS alone - highlighting extent ops are generating/consuming cash.
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What is balance sheet? Major line items?
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- snapshot of financial position of company at a given period of time.
- Assets: resources that company uses to operate its business (current assets - assets that will convert to cash within one year: cash, AR/AP, inventory)
- Liabs: claims of creditors on company (current liabs - debts or obligations due within one year)
- SE: "book value" of company comes from 2 sources: (1) paid in capital, additional investments, and (2) RE accum. through ops.
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What is an income statement? What are the major line items?
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The income statement provides the results (profitability) of a business’ operations during a specified period of time.
- Revenues: Source of income that arises from the sale of goods and/or services and is recorded when it is earned.
- Expenses: Costs incurred by a business over a specified period of time to generate the revenues earned during that same period of time. Commonly includes COGS and SG&A.
- Net Income: Revenue minus expenses.
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What are major line items on SCF?
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The cash flow provides a summary of the inflows and outflows of cash
during a specific time period.
- Cash Flow from Operations: Includes sales, dividends, interest, cash paid to suppliers, salaries, and taxes.
Cash Flow from Investments: Includes purchase and sale of equipment and
land.
- Cash Flow from Financing: Includes repayment of debt and payment of
dividends.
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If you had to use one of the three financial statements to value a company, which would you use and why?
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TBD
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On which FS would you find depreciation?
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SCF
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What do you do if you understated depreciation by $100 and discovered the error in a period after statements were issues?
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- decrease NI by $65 (tax shield of $35 offsets decrease)
- SE decreases by $65 due to decrease in NI. Net PPE decreases by $100 due to increase in depreciation. Accounting Equation (A = L +SE) balanced by creating a Deferred Tax Asset of $35.
- Cash flow doesn't change (its a non-cash transaction). NI is reduced by $65, $100 in depreciation is added back, $35 in changes to deferred taxed subtracted, resulting in no change.
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If co uses more accelerated depreciation method (taking $20 in depreciation expense per year instead of $10), how would all 3 FS change?
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Same as depreciation error.
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Where would you put a convertible bond on the BS?
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Under LT liabilities.
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Why might a bond's cash payment and interest expense be different during a given period?
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- they'll only be the same if bond issued at par.
- bond's cash payment is = coupon rate X face value
- bond's interest expense = mkt yield X value of the balance sheet debt liability
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3 explanations for a declining ROE?
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1. NI decreased
2. More equity issued
3. Divs paid out, lowering SE
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What is minority interest?
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- minority interest is parent co's claim to its subsidiary's earnings, contingent on what % of subsidiary is owned by parent company.
- if minority interest is significant in absolute amount, parent co's treatement of MI can affect its interest coverage, which is indicator of a co's financial health
- theoretical accurate accounting treatment for parent co is: (1) net earnings should exclude earnings from subsidiaries, (2) dividend charges should also exclude those of subsidiaries as well
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Using indirect method, what are 4 major adjustments you make to NI to arrive at Cash Flow from Ops?
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1. add depreciation
2. subtract net increases in AR
3. subtract net increases in inventory
4. add net icreases in AP
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