accounting: income statement and cash flow

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This covers accounting basics including the Income Statement and the Cash-flow Statement. The link also includes some investment ratios.


  • 1. Accounting: Income Statementand Statement of cash flowsBy Cameron Fen

2. Income Statement Income Statement includes Revenues,Expenses and Profit We also like to talk about margins which isusually a percentage of revenue Ex net profit margins = net profit/revenue As an investor we dont just look at this yearsearnings, look at the long term earnings trendas well as average earnings 3. Revenue and Cost of Goods Sold Revenue is the total amount of sales thecompany has made What is Cost of Goods Sold mean? What does Gross Profit Margin mean? 4. Revenue and Cost of Goods Sold Revenue is the total amount of sales thecompany has made Cost of Goods Sold is the total direct cost ofsales Ex how much it costs to buy the materials andmanufacture a phone Gross Profit is Revenue COGS Gross Margin is Gross Profit/Revenue 5. Operating Expenses Operating Expenses are expenses necessaryfor the operations of the business What are different types of operatingexpenses? 6. Operating Expenses Operating Expenses are expenses necessaryfor the operations of the business Different types of expenses include SG&A,R&D, D&A and other 7. SG&A and R&D Selling General and Administrative includesmarketing expenses as well as administrationexpenses (obviously!) Research and Development is somethingcompanies can cut to boost earnings in theshort term but doesnt bode well in the longterm. R&D often times gives a company its moat andbenefits from economies of scale 8. Operating profit and interest expenses What is operating profit comprised of? How do you get from operating profit to profitbefore taxes? 9. Operating profit and interest expenses Operating profit is gross profit minusoperating expenses Next you take away interest expenses and addin interest income to get Profit before taxes Here S&P adds affiliate income and other incometoo (take accounting if you are interested inlearning more) 10. Taxes and profit After you take out taxes you get net profit Sometimes you will have to takeout minorityowners interest as well as preferred interestbefore you get earning attributable tocommon shareholders Net profit margin = net profit/revenue 11. Some other terms EBIT = Earnings Before Interest and Taxes When trying to calculate enterprise value ratios (moreon that later) you will use EBIT in place of earnings EBITDA = Earnings Before Interest TaxesDepreciation and Amortization D&A is a real cost the business has to pay but oftentimes a bond holders will use this to measure howsafe it is Sometimes equity holders will use this metric too toevaluate the company if say the company is notmaking any money yet 12. EBIT 13. EBITDA 14. What is the Statement of CashFlow? 15. Cash Flow The statement of cash flow measures thechange in cash from one period to the next Statement of Cash Flow split into 3 parts Cash from Operations, Cash from Investments andCash from Financing Since the balance sheet has to balance, thechange in cash is equal to the opposite changein everything else on the balance sheet 16. What do you think is included inCash from Operations? 17. Cash for Operations Cash from Operations include net income plusall non cash expenses on the incomestatement (Ex Depreciation and Amortization)as well as includes all the changes in currentassets and current liabilities 18. What will be included in Cashfrom Investing? 19. Cash from Investments Cash from Investments primarily includesCapital expenditures, acquisitions, andpurchases of investments 20. What about Cash fromFinancing? 21. Cash from Financing Includes paying and repaying debt, dividendsand buyback payments 22. Free Cash Flow (FCF) This is another measure of earning power Free Cash Flow is Cash from Operations minusCapital Expenditures This is the amount of money available to commonshareholders Usually a more accurate measure of the earningpower of a company than net earnings if averagedover the long term If the company is growing a lot need to adjustcapital expenditures for growth capex 23. Stock JargonDoes anyone know any ratios orwords we use when looking atvaluation? 24. Stock Statistics Market Capitalization: The total value of thecompany usually the total value of all thestock Enterprise Value (EV): Total Debt + MarketCapitalization Cash This is how much debt and equity holders valuethe operating business 25. Stock Ratios P/E ratio: The total market capitalizationdivided by the net income The inverse of the P/E gives you the earning yieldand can help approximate the rate of return youshould expect from the stock if there is no growthand mediocre but not poor capital allocation andno capital appreciation Can think of the earnings yield as the interest rateon the equity 26. EV ratios EV/EBIT: gives the ratio of earnings that goesto the Enterprise owners (keep in mindinterest is the earnings that go to debtholders) EV/EBITDA: It is used for debt and equityanalysis but shouldnt be It is just another ratio to value how cheap acompany 27. Return on equity/investments Return on Equity = net profit/total equity inthe company Measures how effectively the equity generatesincome Return on Investment = net profit/(equity +debt) Measures how effectively a dollar in enterprisevalue generates income


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