Walk me through the 3 financial statements

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MT327

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What is best way to approach this question in an interview?
 
The balance sheet is THE most important. It tells you the accounting values for their assets and liabilities. You need to adjust these accounting value to reflect reality.
The income statement tells you how their business is doing now. Sales, expenses, etc.
The cashflow statement tells you how bad management is screwing over the shareholders.
note: the 3 things make up a financial statement. There are not 3 financial statements.
 
Thanks. What is the best way to explain how they are interrelated? I assume start with the income statement and walk through it and explain how it ends up on the balance sheet and/or CF statement?
For example:
Sales - Goes to the Balance sheet in the form of cash or AR and increases SHE - If cash shows up on CFO
Sales Exp - Deducts from Cash or adds to AP and decreases SE - it shows up in CFO
General & Administrative - same as Sales exp
Interest - shows up as deduction of cash and deduction of Int Exp on B/S - shows up in CFO
Taxes - Same as Interest only it deducts from Tax Payable
Nonrecurring - Not sure but I assume it will depend on the nature of the incident
Dividends - Decrease cash and SE and goes on CFO
Any mistakes here? Forgetting anything?
 
Dividends paid - Decrease cash and Retained Earnings and goes on CFF
 
cpk123 Wrote:
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> Dividends paid - Decrease cash and Retained
> Earnings and goes on CFF
Yup your right thanks. RE is no more than a component of SHE tho correct?
 
i think you have it mostly right. Id start with sales and trace a dollar of revenue from customer to company and go thru all stmtms/ make sure you tell em if sale is booked as def rev (liability) or it is an acct recievable type sale (accrual?) where cash comes later….
also, balance sheet,
RE this year = RE last yr + this years net income - this yrs divdidends paid out
SE = CS + APIC + RE - treasury stock. know that treasury stock is a subtraction, maybe they trick you and ask what happens if company buys 2M worth of stock, but i dont they will get that technical
 
virginCFAhooker Wrote:
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> The balance sheet is THE most important. It tells
> you the accounting values for their assets and
> liabilities. You need to adjust these accounting
> value to reflect reality.
maybe the BS is most important to you perosnally, but if you were to say this in an interview for equity research (which the OP is preparing for) you would come off looking very silly.
 
stylemog Wrote:
——————————————————-
> virginCFAhooker Wrote:
> ————————————————–
> —–
> > The balance sheet is THE most important. It
> tells
> > you the accounting values for their assets and
> > liabilities. You need to adjust these
> accounting
> > value to reflect reality.
>
>
> maybe the BS is most important to you perosnally,
> but if you were to say this in an interview for
> equity research (which the OP is preparing for)
> you would come off looking very silly.
Can you please explain why this is the wrong answer in an ER interview? If asked what statement is the most important my knee jerk reaction would be the B/S because it and its related ratios are the best indicator of the overall health of the firm.
 
stylemog Wrote:
——————————————————-
> virginCFAhooker Wrote:
>
>
> maybe the BS is most important to you perosnally,
> but if you were to say this in an interview for
> equity research (which the OP is preparing for)
> you would come off looking very silly.
+ 1.
dont say balance sheet unless you are interviewing with GAMCO or 3rd avenue. I always default to SCF. A company can book beautiful EPS and still go broke. on level 2 materials (i was at barnes and noble last night crushing latte and quant), it says there is weak positive correlation b/t NI, FCFF, and CFO.
: ) -
 
I’ll take the cash flow statement over the balance sheet any day of the week.
 
I guess CF is a better answer now that I think about it because it shows the ability of a firm to generate cash to continue to operate. Thus if asked which of the 3 component of the CFstmt is most important CFO is the most important. Right?
 
MT327 Wrote:
——————————————————-
> I guess CF is a better answer now that I think
> about it because it shows the ability of a firm to
> generate cash to continue to operate. Thus if
> asked which of the 3 component of the CFstmt is
> most important CFO is the most important. Right?
yes!!!!! sell side is EPS model centric, but say SCF and you “may” stand out.
 
I can buy the SCF argument. If you want to go striaght to theory using DCF models, the SCF has everything you need. However, you may want to price in the liquidation value in assessing risk, in which case you’d need the BS. I always take the approach that I would need both the BS and the IS to do a proper valuation because with those two I can construct a SCF to get cash flows, while at the same time have a BS to assess liquidity value.
 
Black Swan Wrote:
——————————————————-
> I can buy the SCF argument. If you want to go
> striaght to theory using DCF models, the SCF has
> everything you need. However, you may want to
> price in the liquidation value in assessing risk,
> in which case you’d need the BS. I always take
> the approach that I would need both the BS and the
> IS to do a proper valuation because with those two
> I can construct a SCF to get cash flows, while at
> the same time have a BS to assess liquidity value.
good to have you back homey. where ya been?
 
Ok, but that’s why you’ll keep losing money.
Over the long haul, value always outperforms growth. Value investors always focus on the assets. Assets only show up on the balance sheet.
I find that intuitive and it has kept me out of a lot of trouble.
If you can properly adjust a balance sheet to reflect market values then that is almost all you need to be successful.
 
disagree. there are off B/s assets and especially off balance sheet risks that cannot be estimated, (short vol risk).
 
what is vol risk? volume risk? WTF? volatilty risk? What is that? Who cares?
if you adjust the balance sheet properly then off balance sheet stuff is included.
 
virginCFAhooker Wrote:
——————————————————-
> Ok, but that’s why you’ll keep losing money.
>
> Over the long haul, value always outperforms
> growth. Value investors always focus on the
> assets. Assets only show up on the balance
> sheet.
>
> I find that intuitive and it has kept me out of a
> lot of trouble.
>
> If you can properly adjust a balance sheet to
> reflect market values then that is almost all you
> need to be successful.
Not sure this makes sense. How can you get a sense of the value of a Company just from the Balance Sheet? Are you saying that you can properly value a Company using the year to year changes in net working capital?
Given a Company that uses fixed assets including IP to generate cash flows, I would rather look at the income statement, gross, operating and EBITDA margin would give you a better starting point. Not that the balance sheet is not important, but net book value just doesn’t seem the proper way to value most firms.
 
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