Financial Statements and Valuation Fundamentals, Exams of Banking and Finance

Download Financial Statements and Valuation Fundamentals and more Exams Banking and Finance in PDF only on Docsity! 1 / 16 a 1.3 financial statements: The Income Statement, Balance Sheet, and Cash Flow Statement. 2. Income Statement: Gives the company's revenue and expenses, and goes down to Net Income, the final line on the statement. 3.Balance Sheet: Shows the company's Assets, such as Cash, Inventory, and PP&E, as well as its Liabilities and Shareholders' Equity. Assets must equal Lia- bilities plus Shareholders' Equity. 4.Cash Flow Statement: Begins with Net Income, adjusts for non-cash expenses and working capital changes, and lists cash flow from investing and financing activities; at the end, you see the company's net change in cash. 5.Major line items on Income Statement: Revenue; Cost of Goods Sold; SG&A; Operating Income; Pretax Income; Net Income. 6.Major line items on Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment; Accounts Payable; Accrued Expenses; Debt; Share- holders' Equity. 7.Major line items on Cash Flow Statement: Net Income; Depreciation & Amor- tization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow From Financing. 8.Link between the 3 statements: How the 3 statements connect and how to walk through questions where one or multiple items change. 9.Cash-based accounting: Recognizes revenue and expenses when cash is ac- tually received or paid. 2 / 16 10.Accrual accounting: Recognizes revenue and expenses when they are earned or incurred, regardless of when cash is exchanged. 11.Expensing vs. Capitalizing: Determining when to expense something and when to capitalize it; not all expenses are created equal. 12.Goodwill: An intangible asset that arises when a buyer acquires an existing business. 13.Other Intangibles: Non-physical assets that can be identified and valued, such as patents or trademarks. 14.Shareholders' Equity: The residual interest in the assets of the entity after deducting liabilities. 15.Technical Questions: Questions that assess a candidate's understanding of finance concepts, including valuation, accounting, and financial modeling. 16.Fit Questions: Questions that assess a candidate's personal attributes, motiva- tions, and cultural fit for the organization. 17.Merger Models: Financial models used to evaluate the financial implications of a merger or acquisition. 18.LBO Models: Leveraged Buyout models used to evaluate the purchase of a company using borrowed funds. 19.Brain Teasers: Puzzles or problems posed during interviews to assess a can- didate's problem-solving abilities. 20.Discounted Cash Flow (DCF): A valuation method used to estimate the value of an investment based on its expected future cash flows. 21.Enterprise Value: The total value of a business, calculated as market 5 / 16 46.Retained Earnings: Cumulative profits retained in the business. 47.Pre-Tax Income: Income before tax deductions are applied. 48.Cash: Liquid assets available for immediate use. 49.Tax Deductible: Expenses that reduce taxable income. 50.High-yield Debt: Debt with higher interest rates, riskier. 51.Depreciation Rate: Percentage at which an asset depreciates annually. 52.Operating Expenses: Costs associated with running a business. 53.Assets: Resources owned by a company with value. 54.Revenue: Income generated from normal business operations. 55.Cost of Goods Sold (COGS): Direct costs attributable to production of goods. 56.Gross Profit: Revenue minus Cost of Goods Sold. 57.Operating Working Capital: Current Assets minus Cash and Current Liabilities minus Debt. 58.Deferred Revenue: Cash received for services not yet performed. 59.Bailout: Financial assistance to a struggling company. 60.Accounts Receivable: Money owed to a company by customers. 61.Negative Shareholders' Equity: Liabilities exceed assets, indicating financial trouble. 62.Leveraged Buyout (LBO): Acquisition using borrowed funds to meet purchase. 63.Dividend Recapitalization: Taking on debt to pay dividends to shareholders. 64.Financial Metrics: Quantitative measures used to assess financial perfor- mance. 6 / 16 65.Financial Trouble: Indicates potential insolvency or bankruptcy risks. 66.Accounts Receivable Days: Generally in the 30-60 day range, higher for companies selling high-end items and lower for smaller, lower transaction-value companies. 67.Cash-based Accounting: Recognizes revenue and expenses when cash is actually received or paid out. 68.Accrual Accounting: Recognizes revenue when collection is reasonably cer- tain and recognizes expenses when they are incurred rather than when they are paid out in cash. 69.Revenue Recognition in Cash-based Accounting: Revenue does not show up until the company charges the customer's credit card, receives authorization, and deposits the funds in its bank account. 70.Revenue Recognition in Accrual Accounting: Revenue shows up right away but initially goes into Accounts Receivable instead of Cash. 71.Capitalization of Purchases: If the asset has a useful life of over 1 year, it is capitalized and depreciated or amortized over a certain number of years. 72.Examples of Capitalized Purchases: Factories, equipment, and land last longer than a year and show up on the Balance Sheet. 73.GAAP Earnings: Generally Accepted Accounting Principles earnings that in- clude all expenses, including non-cash charges. 74.Non-GAAP Earnings: Earnings that exclude certain expenses, often resulting in higher reported earnings. 75.EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; does not reflect capital expenditures, interest, or one- 7 / 16 time charges. 76.Goodwill Impairment: Occurs when a company reassesses its intangible as- sets and finds they are worth significantly less than originally thought. 77.Circumstances for Goodwill Increase: Goodwill can increase if a company is acquired or pays more than the value of its assets in an acquisition. 78.LIFO: Last-In, First-Out; a method of recording inventory value and Cost of Goods Sold using the most recent inventory additions. 79.FIFO: First-In, First-Out; a method of recording inventory value and Cost of Goods Sold using the oldest inventory additions. 80.Cost of Goods Sold (COGS) under LIFO: Calculated using the 40 most recent inventory purchase values. 81.Cost of Goods Sold (COGS) under FIFO: Calculated using the 40 oldest inventory values. 82.Difference in Pre-Tax Income between LIFO and FIFO: LIFO results in lower Pre-Tax Income and Net Income compared to FIFO. 83.Deferred Tax Assets: Arise when a company pays taxes in cash but hasn't expensed them on the Income Statement yet. 84.Deferred Tax Liabilities: Arise when there is a tax expense on the Income Statement but the tax has not yet been paid in cash. 85.Revenue Model Creation: Can be done through a bottoms-up build or a tops-down build. 86.Temporary Differences: Differences between what a company can deduct for cash tax purposes vs. what they can deduct for book tax 10 / 16 exercised op- tions. 118. Cash Subtraction Reason: Cash is non-operating and reduces acquisition cost. 119. Excess Cash: Cash above operational minimum should be subtracted. 120. Debt in Enterprise Value: Debt usually adds to acquisition purchase price. 121. Negative Enterprise Value: Indicates large cash balance or low market cap. 122. Negative Equity Value: Not possible due to share count and price. 123. Preferred Stock Addition: Preferred stock has fixed dividends and higher claims. 124. Convertible Bonds Accounting: In-the-money bonds count as dilution; oth- erwise debt. 125. Convertible Bonds Calculation: Divide total value by par value for shares. 126. Equity Value vs. Shareholders' Equity: Equity Value is market value; Share- holders' Equity is book value. 127. Net Operating Losses: Should be valued and potentially added to EV. 128. Long-Term Investments: Should be counted similarly to cash in EV. 129. Equity Investments: Investments in other companies should be added in EV. 130. Capital Leases: Considered like debt due to interest payments. 11 / 16 131. Market Value: Current valuation based on stock price. 132. Book Value: Value based on company's financial statements. 133. Exercise Price: Price at which options can be exercised. 134. Share Count: Total number of shares outstanding. 135. Dilutive Securities: Financial instruments that can increase share count. 136. Acquisition Price: Total cost to acquire another company. 137. Operating Leases: May convert to capital leases for valuation. 138. Unfunded Pension Obligations: Considered as debt in some valuations. 139. Dilution in Equity Value: Over 10% dilution is considered unusual. 140. Comparable Companies: Valuation method comparing similar firms. 141. Precedent Transactions: Valuation based on past acquisition prices. 142. Control Premium: Extra value paid in acquisitions for control. 143. Liquidation Valuation: Valuing assets if sold off to pay debts. 144. Replacement Value: Cost to replace a company's assets. 145. LBO Analysis: Valuation method for leveraged buyouts targeting IRR. 146. Sum of the Parts: Valuing each division separately, then summing. 147. M&A Premiums Analysis: Analyzing premiums paid in mergers and acquisi- tions. 148. Future Share Price Analysis: Projecting share price based on P/E 12 / 16 multiples. 149. EV/Revenue: Common multiple comparing enterprise value to revenue. 150. EV/EBITDA: Multiple comparing enterprise value to EBITDA. 151. EV/EBIT: Multiple comparing enterprise value to EBIT. 152. P/E Ratio: Share Price divided by Earnings per Share. 153. P/BV Ratio: Share Price divided by Book Value per Share. 154. Industry-Specific Multiples: Valuation metrics tailored to specific industries. 155. EV/Unique Visitors: Valuation metric for internet companies. 156. EV/EBITDAR: Used for retail and airline valuations. 157. EV/EBITDAX: Used for energy companies, includes exploration expenses. 158. Price/FFO: Common REIT metric, adds back depreciation. 159. Enterprise Value in Multiples: Reflects value available to all investors. 15 / 16 189. Discount Rate: Rate used to discount future cash flows to present value. 190. WACC: Weighted Average Cost of Capital, average rate of return. 191. Liquidity Discount: Reduction applied to private company valuations due to illiquidity. 192. M&A Premiums: Extra amount paid over market value in acquisitions. 193. Return on Equity (ROE): Net Income divided by Shareholders' Equity. 194. Return on Assets (ROA): Net Income divided by Total Assets. 195. Tangible Book Value: Book value excluding intangible assets. 196. Dividend Discount Model (DDM): Valuation method based on present value of future dividends. 197. Residual Income Model: Valuation based on excess returns over expected returns. 198. Calendarizing Financial Statements: Adjusting financial data to reflect trail- ing twelve months. 199. P/B Ratio: Price-to-Book ratio, compares market value to book value. 200. P/TBV Ratio: Price-to-Tangible Book Value ratio, assesses tangible assets. 201. Market Capitalization: Total market value of a company's outstanding shares. 202. Beta: Measure of a stock's volatility in relation to the market. 16 / 16 203. Acquisition: Purchase of one company by another. 204. Financial Institutions Valuation: Uses different metrics like ROE and P/B ratios. 205. IPO Valuation: Valuation process for companies going public. 206. Trailing Twelve Months (TTM): Financial performance over the last twelve months.