WALL STREET PREP FINANCIAL
STATEMENT MODELING CLOSING SCRIPT
UPDATED QUESTIONS AND ANSWERS
VIEW AHEAD PREP MATERIAL SOLVED
⩥ Can you give examples of major line items on each of the
financial statements?
Answer: Income Statement: Revenue; Cost of Goods Sold;
SG&A (Selling, General & Administrative) Expenses; Operating
Income; Pre-Tax Income; Net Income.
Balance Sheet: Cash; Accounts Receivable; Inventory; Plants,
Property & Equipment (PP&E); Accounts Payable; Accrued
Expenses; Debt; Shareholders' Equity.
Cash Flow Statement: Cash Flow from Operations (Net Income;
Depreciation & Amortization; Stock-Based Compensation;
Changes in Operating Assets & Liabilities); Cash Flow from
Investing (Capital Expenditures, Sale of PP&E, Sale/Purchase of
Investments); Cash Flow from Financing (Dividends Issued,
Debt Raised / Paid Off, Shares Issued / Repurchased)
,⩥ How do the 3 statements link together?
Answer: To tie the statements together, Net Income from the
Income Statement becomes the top line of the Cash Flow
Statement.
Then, you add back any non-cash charges such as Depreciation
& Amortization to this Net Income number.
Next, changes to operational Balance Sheet items appear and
either reduce or increase cash flow depending on whether they
are Assets or Liabilities and whether they go up or down. That
gets you to Cash Flow from Operations.
Now you take into account investing and financing activities and
changes to items like PP&E and Debt on the Balance Sheet;
those will increase or decrease cash flow, and at the bottom you
get the net change in cash.
On the Balance Sheet for the end of this period, Cash at the top
equals the beginning Cash number (from the start of this period),
plus the net change in cash from the Cash Flow Statement.
, On the other side, Net Income flows into Shareholders' Equity to
make the Balance Sheet balance.
At the end, Assets must always equal Liabilities plus Equity.
⩥ If I were stranded on a desert island and only had one
financial statement and I wanted to review the overall health of a
company, which statement would I use and why?
Answer: You would use the Cash Flow Statement because it
gives a true picture of how much cash the company is actually
generating - the Income Statement is misleading because it
includes non-cash expenses and excludes actual cash expenses
such as Capital Expenditures.
And that's the #1 thing you care about when analyzing the
financial health of any business - its true cash flow.
⩥ Let's say I could only look at 2 statements to assess a
company's prospects - which 2 would I use and why?
Answer: You would pick the Income Statement and Balance
Sheet because you can create the Cash Flow Statement from
both of those (assuming that you have "Beginning" and
"Ending" Balance Sheets that correspond to the same period
STATEMENT MODELING CLOSING SCRIPT
UPDATED QUESTIONS AND ANSWERS
VIEW AHEAD PREP MATERIAL SOLVED
⩥ Can you give examples of major line items on each of the
financial statements?
Answer: Income Statement: Revenue; Cost of Goods Sold;
SG&A (Selling, General & Administrative) Expenses; Operating
Income; Pre-Tax Income; Net Income.
Balance Sheet: Cash; Accounts Receivable; Inventory; Plants,
Property & Equipment (PP&E); Accounts Payable; Accrued
Expenses; Debt; Shareholders' Equity.
Cash Flow Statement: Cash Flow from Operations (Net Income;
Depreciation & Amortization; Stock-Based Compensation;
Changes in Operating Assets & Liabilities); Cash Flow from
Investing (Capital Expenditures, Sale of PP&E, Sale/Purchase of
Investments); Cash Flow from Financing (Dividends Issued,
Debt Raised / Paid Off, Shares Issued / Repurchased)
,⩥ How do the 3 statements link together?
Answer: To tie the statements together, Net Income from the
Income Statement becomes the top line of the Cash Flow
Statement.
Then, you add back any non-cash charges such as Depreciation
& Amortization to this Net Income number.
Next, changes to operational Balance Sheet items appear and
either reduce or increase cash flow depending on whether they
are Assets or Liabilities and whether they go up or down. That
gets you to Cash Flow from Operations.
Now you take into account investing and financing activities and
changes to items like PP&E and Debt on the Balance Sheet;
those will increase or decrease cash flow, and at the bottom you
get the net change in cash.
On the Balance Sheet for the end of this period, Cash at the top
equals the beginning Cash number (from the start of this period),
plus the net change in cash from the Cash Flow Statement.
, On the other side, Net Income flows into Shareholders' Equity to
make the Balance Sheet balance.
At the end, Assets must always equal Liabilities plus Equity.
⩥ If I were stranded on a desert island and only had one
financial statement and I wanted to review the overall health of a
company, which statement would I use and why?
Answer: You would use the Cash Flow Statement because it
gives a true picture of how much cash the company is actually
generating - the Income Statement is misleading because it
includes non-cash expenses and excludes actual cash expenses
such as Capital Expenditures.
And that's the #1 thing you care about when analyzing the
financial health of any business - its true cash flow.
⩥ Let's say I could only look at 2 statements to assess a
company's prospects - which 2 would I use and why?
Answer: You would pick the Income Statement and Balance
Sheet because you can create the Cash Flow Statement from
both of those (assuming that you have "Beginning" and
"Ending" Balance Sheets that correspond to the same period
