Wall Street Prep Redbook
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1. What is the pri- In the US, the Securities and Exchange Commission ("SEC") authorizes the Finan-
mary purpose of cial Accounting Standards Board ("FASB") to determine the set of accounting rules
US GAAP? followed by publicly traded companies.
Under FASB, financial statements are required to be prepared in accordance with
US Generally Accepted Accounting Principles ("US GAAP").
Through the standardization of financial reporting and ensuring all financials are
presented on a fair, consistent basis - the interests of investors and lenders are
protected.
2. What are the In a 10-K, you'll find the three core financial statements, which are the income
main sections of statement, cash flow statement, and balance sheet. There'll also be a statement of
a 10-K? shareholders' equity, a statement of comprehensive income, and supplementary
data and disclosures to accompany the financials.
Business Overview: Overview of the company's business divisions, strategy, prod-
uct or service offerings, seasonality, geographical footprint, and key risks.
Management's Discussion & Analysis ("MD&A"): Commentary and summarized
analysis of the company's fiscal year result from the perspective of the manage-
ment team.
Financial Statements: The "Core 3": Income Statement, Balance Sheet, Cash Flow
Statement The "Other 2": Statement of Comprehensive Income, Statement of
Shareholders' Equity
3. What is the differ- 10-K: A 10-K is the annual report required to be filed with the SEC for any public
ence between company in the U.S. The report is comprehensive and includes a full overview of
the 10-K and the business operations, commentary on recent performance by management,
10-Q? risk factors, disclosures on changes in accounting policies - and most importantly,
the three core financial statements with supplementary data.
, Wall Street Prep Redbook
Study online at https://quizlet.com/_ayqhk9
10-Q: A 10-Q refers to the quarterly report required to be filed with the SEC.
Compared to the 10-K, this report is far more condensed in length and depth,
with the focus being on the quarterly financials with brief sections for MD&A and
supplementary disclosures.
Additional Differences: A few more differences are 10-Ks are required to be
audited by an independent accounting firm, but 10-Qs are only reviewed by CPAs
and left unaudited. 10-Ks must also be filed ~60-90 days after the fiscal year ends,
whereas 10-Qs must be submitted ~40-45 days after the quarter ends.
4. Walk me through Income Statement ("IS"): The income statement shows a company's profitability
the three finan- over a specified period, typically quarterly and annually. The beginning line item
cial statements. is revenue and upon deducting various costs and expenses, the ending line item
is net income.
Balance Sheet ("BS"): The balance sheet is a snapshot of a company's resources
(assets) and sources of funding (liabilities and shareholders' equity) at a specific
point in time, such as the end of a quarter or fiscal year.
Cash Flow Statement ("CFS"): Under the indirect approach, the starting line item
is net income, which will be adjusted for non-cash items such as D&A and changes
in working capital to arrive at cash from operations. Cash from investing and
financing activities are then added to cash from operations to arrive at the net
change in cash, which represents the actual cash inflows/(outflows) in a given
period.
5. Walk me through The income statement shows a company's accrual-based profitability over a speci-
the income state- fied time period and facilitates the analysis of its historical growth and operational
ment. performance. The table below lists the major income and expense components
of the income statement:
Net Revenue (or Sales): The income statement begins with revenue (often called
the "top line"), which represents the total value of all sales of goods and delivery
, Wall Street Prep Redbook
Study online at https://quizlet.com/_ayqhk9
of services throughout a specified period.
Less: Cost of Goods Sold: COGS represents the costs directly tied to producing
revenue, such as the costs of materials and direct labor.
Gross Profit: Revenues - Cost of Goods Sold = Gross Profit
Less: Research & Development ("R&D"): R&D refers to developing new products or
procedures to improve their existing product/service offering mix.
EBITDA: Gross Profit - SG&A - R&D = EBITDA. EBITDA stands for: Earnings Before
Interest, Taxes, Depreciation & Amortization.
Less: Depreciation & Amortization ("D&A"): D&A is a non-cash expense that esti-
mates the annual reduction in the value of fixed and intangible assets
Operating Income ("EBIT"): EBITDA - D&A = Operating Income (or EBIT) EBIT
stands for: Earnings Before Interest and Taxes.
Less: Interest Expense, net: Interest expense from debt, net of interest income
generated from investments.
Pre-Tax Income ("EBT"): EBIT - Interest Expense, net = Pre-Tax Income (or "Earn-
ings Before Tax")
Less: Tax Expense: Tax liability recorded by a company for book purposes.
Net Income: EBT - Tax Expense = Net Income (referred to as the "bottom line")
6. Walk me through The balance sheet shows a company's assets, liabilities, and equity sections at a
the balance specific point in time. The fundamental accounting equation is: Assets = Liabilities
sheet. + Shareholders' Equity. The assets belonging to a company must have been
funded somehow, so assets will always be equal to the sum of liabilities and
equity.
, Wall Street Prep Redbook
Study online at https://quizlet.com/_ayqhk9
Assets Section: Assets are organized in the order of liquidity, with "Current Assets"
being assets that can be converted into cash within a year, such as cash itself,
along with marketable securities, accounts receivable, prepaid expenses, and
inventories. "Long-Term Assets" include property, plant, and equipment (PP&E),
intangible assets, goodwill, and long-term investments.
Liabilities Section: Liabilities are listed in the order of how close they're to com-
ing due. "Current Liabilities" include accounts payable, accrued expenses, and
short-term debt, while "Long-Term Liabilities" include items such as long-term
debt, deferred revenue, and deferred income taxes.
Shareholders' Equity Section: The equity section consists of common stock, addi-
tional paid-in capital (APIC), treasury stock, and retained earnings.
7. Could you give Assets: Assets are resources with economic value that can be sold for money or
further context bring positive monetary benefits in the future. For example, cash and marketable
on what assets, li- securities are a store of monetary value that can be invested to earn interest/re-
abilities, and eq- turns, accounts receivable are payments due from customers, and PP&E is used
uity each repre- to generate cash flows in the future - all representing inflows of cash.
sent?
Liabilities: Liabilities are unsettled obligations to another party in the future
and represent the external sources of capital from third parties, which help fund
the company's assets (e.g., debt capital, payments owed to suppliers/vendors).
Unlike assets, liabilities represent future outflows of cash.
Equity: Equity is the capital invested in the business and represents the internal
sources of capital that helped fund its assets. The providers of capital could
range from being self-funded to outside institutional investors. In addition, the
accumulated net profits over time will be shown here as "Retained Earnings."
8. What are the typ- Assets Section
ical line items
Study online at https://quizlet.com/_ayqhk9
1. What is the pri- In the US, the Securities and Exchange Commission ("SEC") authorizes the Finan-
mary purpose of cial Accounting Standards Board ("FASB") to determine the set of accounting rules
US GAAP? followed by publicly traded companies.
Under FASB, financial statements are required to be prepared in accordance with
US Generally Accepted Accounting Principles ("US GAAP").
Through the standardization of financial reporting and ensuring all financials are
presented on a fair, consistent basis - the interests of investors and lenders are
protected.
2. What are the In a 10-K, you'll find the three core financial statements, which are the income
main sections of statement, cash flow statement, and balance sheet. There'll also be a statement of
a 10-K? shareholders' equity, a statement of comprehensive income, and supplementary
data and disclosures to accompany the financials.
Business Overview: Overview of the company's business divisions, strategy, prod-
uct or service offerings, seasonality, geographical footprint, and key risks.
Management's Discussion & Analysis ("MD&A"): Commentary and summarized
analysis of the company's fiscal year result from the perspective of the manage-
ment team.
Financial Statements: The "Core 3": Income Statement, Balance Sheet, Cash Flow
Statement The "Other 2": Statement of Comprehensive Income, Statement of
Shareholders' Equity
3. What is the differ- 10-K: A 10-K is the annual report required to be filed with the SEC for any public
ence between company in the U.S. The report is comprehensive and includes a full overview of
the 10-K and the business operations, commentary on recent performance by management,
10-Q? risk factors, disclosures on changes in accounting policies - and most importantly,
the three core financial statements with supplementary data.
, Wall Street Prep Redbook
Study online at https://quizlet.com/_ayqhk9
10-Q: A 10-Q refers to the quarterly report required to be filed with the SEC.
Compared to the 10-K, this report is far more condensed in length and depth,
with the focus being on the quarterly financials with brief sections for MD&A and
supplementary disclosures.
Additional Differences: A few more differences are 10-Ks are required to be
audited by an independent accounting firm, but 10-Qs are only reviewed by CPAs
and left unaudited. 10-Ks must also be filed ~60-90 days after the fiscal year ends,
whereas 10-Qs must be submitted ~40-45 days after the quarter ends.
4. Walk me through Income Statement ("IS"): The income statement shows a company's profitability
the three finan- over a specified period, typically quarterly and annually. The beginning line item
cial statements. is revenue and upon deducting various costs and expenses, the ending line item
is net income.
Balance Sheet ("BS"): The balance sheet is a snapshot of a company's resources
(assets) and sources of funding (liabilities and shareholders' equity) at a specific
point in time, such as the end of a quarter or fiscal year.
Cash Flow Statement ("CFS"): Under the indirect approach, the starting line item
is net income, which will be adjusted for non-cash items such as D&A and changes
in working capital to arrive at cash from operations. Cash from investing and
financing activities are then added to cash from operations to arrive at the net
change in cash, which represents the actual cash inflows/(outflows) in a given
period.
5. Walk me through The income statement shows a company's accrual-based profitability over a speci-
the income state- fied time period and facilitates the analysis of its historical growth and operational
ment. performance. The table below lists the major income and expense components
of the income statement:
Net Revenue (or Sales): The income statement begins with revenue (often called
the "top line"), which represents the total value of all sales of goods and delivery
, Wall Street Prep Redbook
Study online at https://quizlet.com/_ayqhk9
of services throughout a specified period.
Less: Cost of Goods Sold: COGS represents the costs directly tied to producing
revenue, such as the costs of materials and direct labor.
Gross Profit: Revenues - Cost of Goods Sold = Gross Profit
Less: Research & Development ("R&D"): R&D refers to developing new products or
procedures to improve their existing product/service offering mix.
EBITDA: Gross Profit - SG&A - R&D = EBITDA. EBITDA stands for: Earnings Before
Interest, Taxes, Depreciation & Amortization.
Less: Depreciation & Amortization ("D&A"): D&A is a non-cash expense that esti-
mates the annual reduction in the value of fixed and intangible assets
Operating Income ("EBIT"): EBITDA - D&A = Operating Income (or EBIT) EBIT
stands for: Earnings Before Interest and Taxes.
Less: Interest Expense, net: Interest expense from debt, net of interest income
generated from investments.
Pre-Tax Income ("EBT"): EBIT - Interest Expense, net = Pre-Tax Income (or "Earn-
ings Before Tax")
Less: Tax Expense: Tax liability recorded by a company for book purposes.
Net Income: EBT - Tax Expense = Net Income (referred to as the "bottom line")
6. Walk me through The balance sheet shows a company's assets, liabilities, and equity sections at a
the balance specific point in time. The fundamental accounting equation is: Assets = Liabilities
sheet. + Shareholders' Equity. The assets belonging to a company must have been
funded somehow, so assets will always be equal to the sum of liabilities and
equity.
, Wall Street Prep Redbook
Study online at https://quizlet.com/_ayqhk9
Assets Section: Assets are organized in the order of liquidity, with "Current Assets"
being assets that can be converted into cash within a year, such as cash itself,
along with marketable securities, accounts receivable, prepaid expenses, and
inventories. "Long-Term Assets" include property, plant, and equipment (PP&E),
intangible assets, goodwill, and long-term investments.
Liabilities Section: Liabilities are listed in the order of how close they're to com-
ing due. "Current Liabilities" include accounts payable, accrued expenses, and
short-term debt, while "Long-Term Liabilities" include items such as long-term
debt, deferred revenue, and deferred income taxes.
Shareholders' Equity Section: The equity section consists of common stock, addi-
tional paid-in capital (APIC), treasury stock, and retained earnings.
7. Could you give Assets: Assets are resources with economic value that can be sold for money or
further context bring positive monetary benefits in the future. For example, cash and marketable
on what assets, li- securities are a store of monetary value that can be invested to earn interest/re-
abilities, and eq- turns, accounts receivable are payments due from customers, and PP&E is used
uity each repre- to generate cash flows in the future - all representing inflows of cash.
sent?
Liabilities: Liabilities are unsettled obligations to another party in the future
and represent the external sources of capital from third parties, which help fund
the company's assets (e.g., debt capital, payments owed to suppliers/vendors).
Unlike assets, liabilities represent future outflows of cash.
Equity: Equity is the capital invested in the business and represents the internal
sources of capital that helped fund its assets. The providers of capital could
range from being self-funded to outside institutional investors. In addition, the
accumulated net profits over time will be shown here as "Retained Earnings."
8. What are the typ- Assets Section
ical line items
