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Financial Statements and Valuation Fundamentals, Exams of Banking and Finance

Harrisburg Area Community College (HACC) - LancasterBanking and Finance

A comprehensive overview of the key financial statements - the income statement, balance sheet, and cash flow statement - and their major line items. It also covers fundamental concepts in financial modeling and valuation, including cash-based vs. Accrual accounting, enterprise value, equity value, working capital, depreciation, and various valuation methodologies such as discounted cash flow (dcf), comparable company analysis, and precedent transactions. The document delves into the nuances of these topics, explaining how they are calculated, their significance, and their applications in financial analysis and decision-making. It serves as a valuable resource for students and professionals seeking to develop a strong understanding of corporate finance and valuation principles.

Typology: Exams

2024/2025

Available from 10/17/2024

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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.
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1 / 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 /

  1. Accrual accounting: Recognizes revenue and expenses when they are earned or incurred, regardless of when cash is exchanged.
  2. Expensing vs. Capitalizing: Determining when to expense something and when to capitalize it; not all expenses are created equal.
  3. Goodwill: An intangible asset that arises when a buyer acquires an existing business.
  4. Other Intangibles: Non-physical assets that can be identified and valued, such as patents or trademarks.
  5. Shareholders' Equity: The residual interest in the assets of the entity after deducting liabilities.
  6. Technical Questions: Questions that assess a candidate's understanding of finance concepts, including valuation, accounting, and financial modeling.
  7. Fit Questions: Questions that assess a candidate's personal attributes, motiva- tions, and cultural fit for the organization.
  8. Merger Models: Financial models used to evaluate the financial implications of a merger or acquisition.
  9. LBO Models: Leveraged Buyout models used to evaluate the purchase of a company using borrowed funds.
  10. Brain Teasers: Puzzles or problems posed during interviews to assess a can- didate's problem-solving abilities.
  11. Discounted Cash Flow (DCF): A valuation method used to estimate the value of an investment based on its expected future cash flows.
  12. Enterprise Value: The total value of a business, calculated as market

4 /

  1. Cash Flow from Operations: Cash generated from core business activities.
  2. Interest Expense: Cost incurred from borrowed funds.
  3. Write-down: Reduction in book value of an asset.
  4. Net Change in Cash: Difference in cash balance over a period.
  5. Cash Flow from Investing: Cash used for investments in long-term assets.
  6. Cash Flow from Financing: Cash raised or paid back from financing activities.
  7. Non-cash Expense: Expense not requiring cash outflow.
  8. Liabilities: Obligations owed to outside parties.

5 /

  1. Retained Earnings: Cumulative profits retained in the business.
  2. Pre-Tax Income: Income before tax deductions are applied.
  3. Cash: Liquid assets available for immediate use.
  4. Tax Deductible: Expenses that reduce taxable income.
  5. High-yield Debt: Debt with higher interest rates, riskier.
  6. Depreciation Rate: Percentage at which an asset depreciates annually.
  7. Operating Expenses: Costs associated with running a business.
  8. Assets: Resources owned by a company with value.
  9. Revenue: Income generated from normal business operations.
  10. Cost of Goods Sold (COGS): Direct costs attributable to production of goods.
  11. Gross Profit: Revenue minus Cost of Goods Sold.
  12. Operating Working Capital: Current Assets minus Cash and Current Liabilities minus Debt.
  13. Deferred Revenue: Cash received for services not yet performed.
  14. Bailout: Financial assistance to a struggling company.
  15. Accounts Receivable: Money owed to a company by customers.
  16. Negative Shareholders' Equity: Liabilities exceed assets, indicating financial trouble.
  17. Leveraged Buyout (LBO): Acquisition using borrowed funds to meet purchase.
  18. Dividend Recapitalization: Taking on debt to pay dividends to shareholders.
  19. Financial Metrics: Quantitative measures used to assess financial perfor- mance.

7 / time charges.

  1. Goodwill Impairment: Occurs when a company reassesses its intangible as- sets and finds they are worth significantly less than originally thought.
  2. Circumstances for Goodwill Increase: Goodwill can increase if a company is acquired or pays more than the value of its assets in an acquisition.
  3. LIFO: Last-In, First-Out; a method of recording inventory value and Cost of Goods Sold using the most recent inventory additions.
  4. FIFO: First-In, First-Out; a method of recording inventory value and Cost of Goods Sold using the oldest inventory additions.
  5. Cost of Goods Sold (COGS) under LIFO: Calculated using the 40 most recent inventory purchase values.
  6. Cost of Goods Sold (COGS) under FIFO: Calculated using the 40 oldest inventory values.
  7. Difference in Pre-Tax Income between LIFO and FIFO: LIFO results in lower Pre-Tax Income and Net Income compared to FIFO.
  8. Deferred Tax Assets: Arise when a company pays taxes in cash but hasn't expensed them on the Income Statement yet.
  9. Deferred Tax Liabilities: Arise when there is a tax expense on the Income Statement but the tax has not yet been paid in cash.
  10. Revenue Model Creation: Can be done through a bottoms-up build or a tops-down build.
  11. Temporary Differences: Differences between what a company can deduct for cash tax purposes vs. what they can deduct for book tax

8 / purposes.

  1. Capital Expenditures: Spending that is not reflected in EBITDA but can lead to cash-flow negativity.
  2. One-time Charges: Significant charges that can lead to bankruptcy if they are high enough.
  3. Amortization: The gradual write-off of an intangible asset over its useful life.
  4. Bottoms-Up: Estimates from individual products to overall revenue.
  5. Tops-Down: Starts with market size to estimate company revenue.
  6. Expense Model: Detailed expenses based on departments and salaries.
  7. SG&A: Selling, General and Administrative expenses as revenue percentage.
  8. Shareholders' Equity: Ownership interest in a company, including stocks.
  9. Common Stock: Par value of issued stock by the company.
  10. Additional Paid-In Capital: Capital from stock options and IPO above par value.
  11. Treasury Stock: Value of shares repurchased by the company.
  12. Accumulated Other Comprehensive Income: Cumulative gains/losses not included in net income.
  13. Non-Recurring Charges: One-time expenses added back to EBIT/EBITDA.
  14. Net Operating Losses (NOLs): Losses that can offset taxable income in future.

10 / exercised op- tions.

  1. Cash Subtraction Reason: Cash is non-operating and reduces acquisition cost.
  2. Excess Cash: Cash above operational minimum should be subtracted.
  3. Debt in Enterprise Value: Debt usually adds to acquisition purchase price.
  4. Negative Enterprise Value: Indicates large cash balance or low market cap.
  5. Negative Equity Value: Not possible due to share count and price.
  6. Preferred Stock Addition: Preferred stock has fixed dividends and higher claims.
  7. Convertible Bonds Accounting: In-the-money bonds count as dilution; oth- erwise debt.
  8. Convertible Bonds Calculation: Divide total value by par value for shares.
  9. Equity Value vs. Shareholders' Equity: Equity Value is market value; Share- holders' Equity is book value.
  10. Net Operating Losses: Should be valued and potentially added to EV.
  11. Long-Term Investments: Should be counted similarly to cash in EV.
  12. Equity Investments: Investments in other companies should be added in EV.
  13. Capital Leases: Considered like debt due to interest payments.

11 /

  1. Market Value: Current valuation based on stock price.
  2. Book Value: Value based on company's financial statements.
  3. Exercise Price: Price at which options can be exercised.
  4. Share Count: Total number of shares outstanding.
  5. Dilutive Securities: Financial instruments that can increase share count.
  6. Acquisition Price: Total cost to acquire another company.
  7. Operating Leases: May convert to capital leases for valuation.
  8. Unfunded Pension Obligations: Considered as debt in some valuations.
  9. Dilution in Equity Value: Over 10% dilution is considered unusual.
  10. Comparable Companies: Valuation method comparing similar firms.
  11. Precedent Transactions: Valuation based on past acquisition prices.
  12. Control Premium: Extra value paid in acquisitions for control.
  13. Liquidation Valuation: Valuing assets if sold off to pay debts.
  14. Replacement Value: Cost to replace a company's assets.
  15. LBO Analysis: Valuation method for leveraged buyouts targeting IRR.
  16. Sum of the Parts: Valuing each division separately, then summing.
  17. M&A Premiums Analysis: Analyzing premiums paid in mergers and acquisi- tions.
  18. Future Share Price Analysis: Projecting share price based on P/E

13 /

  1. LBO vs DCF Valuation: LBO typically yields lower valuation than DCF.
  2. Football Field Chart: Visual representation of valuation ranges from method- ologies.
  3. Relative Valuation: Valuing an asset based on comparable assets' worth.
  4. Intrinsic Valuation: Valuing an asset based on its cash flows.
  5. Equity Value / EBITDA: Not preferred; excludes total capital structure.
  6. Enterprise Value / EBITDA: Preferred multiple reflecting total capital structure.
  7. Creative Multiples: Non-standard metrics like EV/Unique Visitors.
  8. Unlevered Free Cash Flow: Cash flow available to all investors, excludes interest.
  9. Levered Free Cash Flow: Cash flow available to equity investors, includes interest.
  10. Equity Value / Revenue: Rarely used; applies to negative Enterprise Values.
  11. Valuation Methodologies: Techniques used to assess a company's value.
  12. Median Multiple: Middle value used for valuation from a set.
  13. Valuation Range: Minimum and maximum values derived from methodolo- gies.
  14. Fairness Opinion: Document proving a deal's financial fairness.
  15. Market Leader: Company with the largest market share in an

14 / industry.

  1. Competitive Advantage: Unique benefits not reflected in financials.
  2. Public Company Comparables: Flawed due to emotional market movements.
  3. 75th Percentile: Higher multiple used for companies with advantages.
  4. 25th Percentile: Lower multiple used for distressed companies.
  5. M&A Market: Market for mergers and acquisitions activity.
  6. Thinly-Traded Stocks: Stocks with low trading volume, affecting valuation.
  7. Aggressive Projections: Optimistic forecasts used in valuations.
  8. Valuation Applications: Used in pitch books, fairness opinions, and models.
  9. Financial Criteria: Metrics like revenue and EBITDA for selection.
  10. Geographic Criteria: Location-based selection for comparable companies.
  11. EBITDA Multiple: Valuation metric based on Earnings Before Interest, Taxes, Depreciation, and Amortization.
  12. EBIT Multiple: Valuation metric based on Earnings Before Interest and Taxes.
  13. Capital Expenditures (CapEx): Funds used by a company to acquire or upgrade physical assets.
  14. Enterprise Value (EV): Total value of a business, including debt and equity.

16 /

  1. Acquisition: Purchase of one company by another.
  2. Financial Institutions Valuation: Uses different metrics like ROE and P/B ratios.
  3. IPO Valuation: Valuation process for companies going public.
  4. Trailing Twelve Months (TTM): Financial performance over the last twelve months.