HBX core: Financial Accounting

Average Collection Period

365/accounts receivable turnover or average accounts receivable/average daily credit sales

Days in Inventory

365/inventory turnover = avg inventory / COGS / 365

FCF

= (1-t) x EBIT + DEP - CAPX - change in NWC free cash flow is the amount of cash a company is expected to generate from normal operations t = tax rate EBIT = before interest and taxes DEP = depreciation CapX = capital expenditures NWC = net working capital

Gross Profit Margin

Gross Profit (sales - COGS)/Sales

indirect method of preparing operating section of cash flow

Start with net income from income statement. Make adjustments to undo impact of accruals made during that period.

Net income

Total Revenues - total Expenses

3 types of financial statements

balance sheet, income statement, statement of cash flows

cash flows from operating activities

cash inflows and outflows directly related to earnings from normal operations. Under US GAAP, interest paid is included here. Result is net cash flow from operating activities.

cash flows from financing activities

cash inflows and outflows related to external sources of financing (owners/investors and creditors) for the enterprise. Under GAAP, dividends paid is in this section. Under IFRS, dividends paid may be in operating section an interest paid my be here.

cash flows from investing activities

cash inflows and outflows related to the acquisition or sale of productive facilities, investments in the securities of other companies, and loans to 3rd parties

Inventory Turnover

cost of goods sold/average inventory

IRR

internal rate of return is the discount rate that sets NPV of project to zero. Incorporates the time value of money, as NPV does. Used when there is lack of clarity or consensus around discount rate.

profit margin

net income (revenue - cost of sales) / sales

NPV

net present value. Present value of all cash inflows and outflows of the project.

Gross Profit

net sales (aka revenue) - cost of goods sold

sections of statement of cash flows

operating activities, investing activities, financing activities

Payback Period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost. Ignores time value of money and cash flows that occur after payback period.

Quick Ratio

(Current assets - inventory) / current liabilities Aka acid test ratio

Cash Conversion Cycle (CCC)

= days inventory + average collection period - days purchases outstanding Period between distributing cash and collecting funds associated with a given operation (e.g., sales).

Statement of Cash Flows

A financial statement that provides a detailed financial picture about the cash receipts and cash payments of a business for a specific period of time. It also reconciled beginning and end balances.

Interest coverage ratio

Aka times interest earned = EBIT / interest expense

asset turnover formula

Annual revenue/average total assets

Real accounts

Asset, liability, and equity accounts; these accounts appear on the balance sheet. Companies do not close real accounts, also called permanent accounts. Eg. PPE, land &buildings, deferred revenue, goodwill, intangible assets, office furniture & equipment, prepaid expenses, common stock, inventory, other liabilities, accounts receivable, addtl paid in capital

Debt to Equity Ratio

Average Total Liabilities/Average Stockholder's Equity

leverage

Average total assets / average total equity

Accounts Payable Turnover

COGS/Average Accounts Payable

net sales

Cost of sales + gross profit

Accounts Receivable Turnover

Credit Sales/Average Accounts Receivable

Current Ratio

Current assets / current liabilities Measure of business's ability to pay short term obligations

Days Purchases Outstanding

Days Purchases Outstanding is a measure related to accounts payable turnover that shows the number of days it takes a business to pay its vendors. It = average accounts payable / (COGS/365) = 365 / Accounts Payable Turnover.

EBIAT

EBIAT is an acronym for Earnings Before Interest After Taxes. It is a measure of how much income the business has generated while ignoring the effect of financing and capital structure of the business. It is calculated by adding back interest and taxes to net income, and then calculating and subtracting income tax expense based on the earnings before interest and taxes. = EBIT x (1 - tax rate)

Interest Coverage Ratio

EBITDA / Interest Expense Financial ratio showing a company's ability to pay interest on its debts from its operating income.

Sample size

Necessary Sample Size = (Z-score)2 * StdDev*(1-StdDev) / (margin of error)2

Business in decline cash flow

Negative cash from operating activity, positive cash from investing, either positive or negative in cash flow from financing

Start up cash flow

Negative or low operating activity, negative cash from investing, large fluctuations in cash flow from financing

NWC

Net Working Capital. Calculated by subtracting Current Liabilities from Current Assets (CA- CL).

Profitable/ growing business cash flow

Positive cash from operating activity, negative cash from investing, positive/negative/neutral cash flow from financing

Mature company cash flow

Positive cash from operating activity, slightly negative cash from investing, negative cash flow from financing

Gordon Growth Model

Present value of infinite cash flows = cash flows in final year of projection / (discount rate - growth rate)

ROE

Return on equity = profitability x efficiency x leverage = profit margin (net income/sales) x asset turnover (sales/assets) x leverage (assets/equity) = net income/ owner's equity

nominal accounts

Revenue, expense, and dividend accounts; except for dividends, these accounts appear on the income statement. Companies close nominal accounts, also called temporary accounts, at the end of the accounting period. Eg. COGS, expenses ,sales,