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Which section of the cash flow statement captures interest expense?

Interest expense is recognized on the income statement and thus gets indirectly captured in the cash from operations section.

Income Statement and Balance Sheet Links

Depreciation reduces Net PP&E and amortization reduces non tangible assets. More of these assets on the balance sheet usually leads to more D&A on the income statement Current and long-term debt is what generates interest expense. More debt on the balance sheet usually leads to higher net interest on the Income Statement. Net Income from the income statement is added directly to Shareholder Equity

How does buying a building impact the 3 statements?

Cash goes down by the purchase price and is reflected in the cash from investing section. On the balance sheet, the offsetting entry to the cash reduction is an increase in PP&E. There is no immediate impact on the income statement. Over the life of the asset, depreciation expense from the building is recognized on the income statement and reduces net income by the amount of depreciation expense net of tax expense saved due to the depreciation expense. That's because depreciation is generally tax deductible. On the cash flow statement, depreciation is added back since it is non-cash. On the balance sheet, PPE is reduced by the depreciation and is offset by a reduction to retained earnings for the depreciation expense.

IF YOU COULD CHOOSE TWO OF THE THREE FINANCIAL STATEMENTS IN ORDER TO EVALUATE A COMPANY WHICH WOULD YOU CHOOSE AND WHY?

Choose the income statement and the balance sheet because if you have them, you can actually build the CFS yourself. Remember that cash flow is basically equal to Net Income, plus/minus non-cash items on the income statement, plus rise in liabilities on the balance sheet, minus rise in assets on the balance sheet.

What are deferred tax assets (DTAs)?

DTAs are created when a company recognizes a tax expense on its GAAP income statement that, due to a temporary timing difference between GAAP and IRS accounting rules, is lower than what must be paid to the IRS in that time period. Net operating losses (NOLs) that a company can carryforward against future income often create DTAs. For example, a company that reported pre-tax loss of $10 million will not get an immediate tax refund. Instead, it will be able to carry forward these losses and apply them against future profits. However, for GAAP reporting purposes it will recognize the tax benefit from a presumed future tax refund immediately on the income statement (that's accrual accounting). This difference gets captured in DTAs. As the company generates future profits and uses those NOLs to reduce the future tax liability, the DTAs are reversed. Note: Another common reason for DTAs are differences between book and tax rules for revenue recognition. Broadly speaking, tax rules generally require recognition based on when cash is received, while GAAP rules adhere more rigidly to accrual concepts (recognize revenues when earned).

What are deferred tax liabilities (DTLs)?

DTLs are created when a company recognizes a tax expense on its GAAP income statement that, due to a temporary timing difference between GAAP and IRS accounting rules, is not actually paid to the IRS in that period, but rather is expected to be paid in the future. A common example of DTL's is related to depreciation. Specifically, for tax purposes, companies can depreciate using accelerated depreciation methods, while most companies will elect to use straight-line depreciation for GAAP reporting purposes. This means that for a given depreciable asset, the amount of depreciation expense recognized in the early years for tax purposes will be greater than under GAAP. Those temporary differences are recognized as DTLs. However, since these differences are just temporary - under both book and tax reporting the same cumulative depreciation will be recognized of the life of the asset - at a certain point into the asset's useful life, an inflection point will be reached where the depreciation expense for tax reporting will become lower than for GAAP. At this point, the DTL will stop growing and instead begin to reverse, until it goes back to 0 at the end of the asset's useful life.

IN WHAT WAY IS DEFERRED REVENUE DIFFERENT FROM ACCOUNTS RECEIVABLE?

Deferred revenue is a liability because the company has already collected money from customers for goods or services it has not yet fully delivered. Accounts receivable is an asset because the company has delivered goods or services for customers and has not yet been paid.

What is deferred (unearned) revenue?

Deferred revenue is a liability that represents cash already collected from customers for services that have yet to be performed, or for products yet to be delivered. In other words - revenue that hasn't been earned. A common example of this is gift cards or service agreements or implied rights to future software upgrades associated with a product sold - customers usually pay upfront for these. Note: While you probably don't need to get into this in the interview, you should be comfortable with the underlying accounting: For instance, a company that sells a smartphone for $500 might allocate $480 of the sale to the phone and the remaining $20 to the value of the customer's right to future software upgrades. In this case only, the company would collect $500 in cash but only $480 would be recognized as revenue, with the $20 recognized instead as deferred revenue, which will be recognized as revenue over the next several years as the company "earns" that revenue by providing the software upgrades.

How do you calculate earnings per share?

Earnings per share (EPS) is calculated as net income divided by the company's weighted average shares outstanding during the period. There are two ways to measure EPS - Basic and Diluted. Basic EPS is net income divided by the actual shares, while Diluted EPS is net income divided by actual shares and shares from potentially dilutive securities such as options, restricted stock, and convertible bonds or stock.

What are some examples of "non-recurring" items?

Examples of non-recurring include legal settlements (gain or loss), restructuring expenses and inventory write-down or asset impairments.

Do companies prefer straight-line or accelerated depreciation?

For GAAP reporting purposes, companies generally prefer straight-line depreciation. That's because a company will record lower depreciation in the early years of the asset's life than if they had used accelerated depreciation. As a result, companies using straight-line depreciation will show higher net income than under accelerated depreciation. Of course, eventually into an asset's life, the accelerated approach will begin to show lower depreciation expense than the straight-line. However, companies still prefer straight-line because of the timing: Companies are often hyper-focused on near-term earnings. In addition, for a company that is constantly acquiring new assets, the flip won't occur until the company significantly scales back capital expenditures.

What is goodwill?

Goodwill is an asset that captures excess of the purchase price over fair market value of the net assets of an acquired business. For example, suppose an acquirer buys a company for a purchase price of $500 million with a fair market value of $450 million. In this case, goodwill of $50 million would be recognized on the acquirer's balance sheet. Often in the preliminary phase of analyzing acquisitions, the fair market value is unknown and the target's book value is used instead.

How does selling a building impact the 3 statements?

If I sell a building for $10 million that has a book value of $6 million on my balance sheet, I will recognize a $4 million gain on sale on the income statement which will - ignoring taxes for a moment - increase my net income by $4 million. On the cash flow statement, since the $4 million gain is non-cash, it will be subtracted out from net income in the cash from operations section. In the investing section, the full cash proceeds of $10 million are captured. On the balance sheet, the $6 million book value of the building is removed, while retained earnings increases by $4 million. The net credit of $10 million is offset by a $10 million debit to cash that came from the cash flow statement. Stop here for non-finance students. Business students should expand as follows: The gain on sale will also however result in higher taxes. Assuming a 25% tax rate, I will pay $1 million in additional tax - 25% of $4 million - which will be recognized on the income statement. This lowers retained earnings by $1 million and is offset by a $1 million credit to cash.

TELL ME WHY EACH OF THE FINANCIAL STATEMENTS BY ITSELF IS INADEQUATE FOR EVALUATING A COMPANY?

Income Statement The income statement alone won't tell you whether a company generates enough cash to stay afloat or whether it is solvent. You need the balance sheet to tell you whether the company can meet its future liabilities, and you need the cash flow statement to ensure it is generating enough cash to fund its operations and growth. Balance Sheet The balance sheet alone won't tell you whether the company is profitable because it is only a snapshot on a particular date. A company with few liabilities and many valuable assets could actually be losing a lot of money every year. Cash Flow Statement The cash flow statement won't tell you whether a company is solvent because it could have massive long-term liabilities which dwarf its cash generating capabilities. The cash flow statement won't tell you whether the company's ongoing operations are actually profitable because cash flows in any given period could look strong or weak due to timing rather than the underlying strength of the company's business.

HOW WOULD A $100 DECREASE IN DEPRECIATION EXPENSE ON THE INCOME STATEMENT IMPACT ALL THREE MAJOR FINANCIAL STATEMENTS?

Income Statement When depreciation decreases by $100, EBIT and EBT increase by $100. When EBT increases by $100m, net income increases by ~$60 (assuming a ~40% corporate tax rate which means an extra $40 is paid in taxes). Balance Sheet Since net income increased by $60, shareholder equity also increases by $60. Since an extra $40 is paid in cash taxes, cash decreases by $40. Since depreciation decreased by $100, net PP&E increases by $100. The balance sheet remains in balance since liabilities went up by $60 and assets went up by$60. Cash Flow Statement Net income increased by $60 which increases cash from operations, but PP&E increased by$100 which decreases cash from operations. The net impact is that cash from operations declines by $40 which happens to match both the only cash expense incurred by the drop in depreciation (taxes) as well as the drop in cash on the balance sheet.

"A company runs into financial distress and needs cash immediately. It sells a factory that's listed at $100 on its Balance Sheet for $80. What happens on the 3 statements, assuming a 40% tax rate?"

Income Statement: Record a Loss of $20 on the Income Statement, which reduces Pre-Tax Income by $20 and Net Income by $12 at a 40% tax rate. Cash Flow Statement: Net Income is down by $12, but you add back the $20 Loss since it's non-cash. You also show the full proceeds, $80, in Cash Flow from Investing, so cash at the bottom is up by $88. Balance Sheet: Cash is up by $88, but PP&E is down by $100, so the Assets side is down by $12. The L&E side is also down by $12 because Retained Earnings fell by $12 due to the Net Income decrease, so both sides balance.

How should increases in inventory get handled on the cash flow statement?

Increases in inventory, as well as any other working capital assets, reflect a usage of cash and should thus be reflected as an outflow on the cash from operations section of the cash flow statement. Conversely, increases in working capital liabilities represent a source of cash and should be presented as an inflow in the section.

"A company buys a factory using $100 of debt. A year passes, and the company pays 10% interest on the debt as it depreciates $10 of the factory. It repays $20 of the loan as well. Walk me through the statements from beginning to end, and assume a 40% tax rate."

Initially, nothing changes on the IS. The $100 factory purchase shows up as CapEx on the CFS, and the $100 debt issuance shows up on the CFS as well, offsetting it, so Cash does not change at the bottom. On the Balance Sheet, PP&E is up by $100, and Debt is up by $100, so both sides balance. Then in the first year, you record $10 of interest and $10 of depreciation on the IS, reducing Pre-Tax Income by $20 and Net Income by $12 at a 40% tax rate. On the CFS, Net Income is down by $12, but you add back the $10 of depreciation since it is non-cash, and the $20 loan repayment is a cash outflow, so Cash is down by $22. On the BS, Cash is down by $22, and PP&E is down by $10, so the Assets side is down by $32. On the L&E side, Debt is down by $20 and Retained Earnings is down by $12, so the L&E side is down by $32 and both sides balance.

Do you amortize intangible assets?

Intangible like customer lists, copyrights and patents - assets that have a finite life - are amortized, while others like trademarks (and goodwill) are considered to have indefinite lives and are not amortized.

"What does it mean if a company's Free Cash Flow is growing, but its Change in Working Capital is increasingly negative each year?"

It means that the company's Net Income or non-cash charges are growing by more than its Change in WC is declining, or that its CapEx is becoming less negative (i.e., shrinking) by more than the Change in WC is declining. If a company's Net Income is growing for legitimate reasons, this is a positive sign. But if higher non-cash charges or artificially low CapEx are boosting FCF, both of those are negative.

How do capital leases affect the three financial statements?

Leases treated as capital leases (as opposed to operating leases) create an asset and associated liability for the thing that is being leased. For example, if a company leases a building for 30 years, the building is recognized as an asset on the lessee's balance sheet with a corresponding debt-like liability. The income statement impact is the depreciation expense associated with the building, as well as interest expense associated with the financing

How do capital leases affect the three financial statements?

Leases treated as capital leases (as opposed to operating leases) create an asset and associated liability for the thing that is being leased. For example, if a company leases a building for 30 years, the building is recognized as an asset on the lessee's balance sheet with a corresponding debt-like liability. The income statement impact is the depreciation expense associated with the building, as well as interest expense associated with the financing.

Do companies depreciate land?

No, land is considered to have an indefinite life and is not depreciated.

Is it bad if a company has negative retained earnings?

Not necessarily. Retained earnings will be negative if the company has generated more accounting losses than profits. This is often the case for early-stage companies that are investing heavily to support future growth. The other component of retained earnings is common or preferred dividends, which could contribute to a lower or even negative retained earnings.

Is EBITDA a good proxy for cash flow?

Not really. That's because even though EBITDA does add back D&A - typically the largest non-cash expense - it does not capture any working capital changes during the period. It also doesn't capture cash outflows from taxes or interest payments. Those adjustments would need to be made to get to operating cash flows. EBITDA also doesn't capture stock-based compensation (SBC) expenses required to get to operating cash flows (although an increasingly used "adjusted EBITDA" calculation does add back SBC).

How are the 3 financial statements connected?

Note: This question is similar to "walk me through the 3 financial statements" but focuses on the connections between the three statements. It's quite possible that you may be asked in an interview to define three statements as well as to describe how they're connected in one answer. The financial statements are very interconnected, both directly and indirectly. The income statement is directly connected to the balance sheet through retained earnings. Specifically, net income (the bottom line in the income statement) flows through retained earnings as an increase each period less dividends issued during the period. The offsetting balance sheet adjustments to the increase in retained earnings impacts a variety of line items on the balance sheet, including cash, working capital and fixed assets. The cash flow statement is connected to the income statement through net income as well, which is the starting line of the cash flow statement. Lastly, the cash flow statement is connected to the balance sheet because the cash impact of changes in balance sheet line items like working capital, PP&E (through capex), debt, equity and treasury stock are all reflected in the cash flow statement. In addition, the final calculation in the cash flow statement - net change in cash - is directly connected to balance sheet, as it grows the beginning of the period cash balance to arrive at the end of period cash balance on the balance sheet.

Balance Sheet and Cash Flow Statement

PURPLE: Balance sheet cash is the beginning cash of one CFS period and the ending cash of another CFS period YELLOW: D&A decreases PP&E, non-tangible assets, and goodwill; capex and some other investing activities increases PP&E, non-tangible assets, and goodwill. GREEN: Increases in these assets on the balance sheet decreases cash from operating activities; decreases in these assets increase cash from operating activities. RED: Increases in these liabilities on the balance sheet increase cash from operating activities; decreases in these liabilities decrease cash from operating activities. BLUE: Increases in debt increase cash from debt, and decreases in debt reduce cash from debt; increases in cash from equity increase shareholder equity, and decreases in cash from equity reduce shareholder equity; shareholder dividends reduce shareholder equity.

Why are increases in accounts receivable a cash reduction on the cash flow statement?

Since cash flow statements start with net income, and net income captures all of a company's revenue - not just cash revenue - an increase in accounts receivable suggests that more customers paid with credit during the period and so an adjustment down needs to be made to net income when arriving at cash since the company never actually received those funds - they're still sitting on the balance sheet as receivables.

What does the Change in Working Capital mean, intuitively

The Change in Working Capital tells you if the company needs to spend in advance of its growth, or if it generates more money as a result of its growth. For example, the Change in Working Capital is usually negative for retailers because they must spend money on Inventory before being able to sell their products. But the Change in Working Capital is often positive for subscription-based companies that collect cash in advance because Deferred Revenue increases when they do that. The Change in Working Capital increases or decreases Free Cash Flow, which, in turn, directly affects the company's valuation.

Income Statement and Cash Flow Links

The only major direct connections between the income statement and the cash flow statement are that the Net Income and the D&A portions of the Cash from Operating Activities come from the income statement. The rest of the connections between the income statement and the balance sheet go through the balance sheet.

Walk me through a balance sheet (BS).

The balance sheet shows a company's assets, liabilities and equity sections at a point in time. Assets are organized in order of liquidity, with a section for "current assets" representing assets that can generally be converted into cash within a year. These include cash itself, along with accounts receivable and inventories. Common long-term assets include property, plant and equipment, intangible assets and goodwill. Liabilities are also organized in order of when they are due - current liabilities include accounts payable and short-term debt, while long-term liabilities include long-term debt. Lastly, the equity section shows a company's common stock, treasury stock and retained earnings. Assets represent what a company owns and must always equal liabilities and equity - which represent the way assets were funded.

HOW WOULD YOU CALCULATE CHANGE IN NET WORKING CAPITAL (NWC)?

The classic formula for NWC is current assets (excluding cash) less current liabilities. For a lot of businesses, it is sufficient to define NWC as: NWC = Accounts Receivable + Inventory-Accounts Payable. Change in NWC is simply the difference between NWC in the current period less NWC during the previous period. See the section Net Working Capital for more details and to learn why NWC is important.

What is working capital?

The definition of working capital is current assets less current liabilities. Since current liabilities represent payments that a company needs to make within the year while current assets are things that can be turned into cash within the year (things like accounts receivable, inventory and cash itself), working capital is used as a measure of a company's liquidity. Generally, the more current assets a company has relative to its current liabilities, the lower the company's liquidity risk. Note: There's a definition issue with working capital - namely, when analyzing working capital items on the cash flow statement, only current operating assets and liabilities are called working capital, so be ready for this in case there is a follow up question. More on working capital:

When do you capitalize vs. expense items?

The distinction between what gets capitalized as an asset and what gets expensed is determined based on the timing of the estimated benefits. Purchases of things like fixed assets and intangible assets that are expected to benefit the firm for many years (specifically more than 1 year) need to be capitalized, while the benefits related to the salaries paid apply to the specific period generated. Similar question: Why do capital expenditures create assets that get recognized via depreciated expense slowly over time on the income statement, while other cash outflows like paying salary do not create an asset and are immediately and fully expensed on the income statement as they are incurred?

Walk me through the income statement (IS).

The income statement shows a company's profitability over a period, usually quarterly or annually. The income statement starts with revenues generated during the period and subtracts operating expenses like cost of goods sold and selling, general and administrative expenses (SG&A) to arrive at operating income. Then, non-operating expenses like interest expense are subtracted and any non-operating income is added to arrive at pre-tax income. Then, tax expense is removed to arrive at net income, which is the bottom line. Below the income statement, you will also find the companies weighted average shares outstanding and earnings per share for the period.

What is the impact of share issuance on EPS?

The major impact to EPS is that the actual share count increases, thereby decreasing EPS. However, there is sometimes an impact on net income. That's because assuming share issuances generate cash for the company, there will be higher interest income, which increases net income and EPS slightly. Because returns on excess cash for most companies are low, this impact is usually very minor and doesn't offset the negative impact to EPS from a higher share count.

What is the impact of share repurchases on EPS?

The major impact to EPS is that the actual share count is reduced, thereby increasing EPS. However, there is sometimes an impact on net income. That's because assuming share repurchases are funded with the company's excess cash, any interest income that would have otherwise been generated on that cash is no longer available, thereby reducing net income - and EPS - slightly. Because returns on excess cash for most companies are low, this impact is usually very minor and doesn't offset the positive impact to EPS from a lower share count

A company acquired a machine for $5 million in 2003 and has since generated $3 million in accumulated depreciation. In addition, the PP&E now has a fair value of $20 million. Assuming GAAP, what is the value of that PP&E on the company's balance sheet?

The short answer is $2 million. Except for certain liquid financial assets which can be written up to reflect fair market value, companies must carry the value of assets at their historical cost. Note: Under IFRS, revaluation of PP&E to fair value is permitted. Even though permitted, it isn't used widely and thus not even well known in the US. Don't volunteer this in US interviews unless you feel like the interviewer is specifically fishing for this.

IF YOU HAD TO VALUE A COMPANY BASED ON A SINGLE NUMBER FROM ITS FINANCIAL STATEMENTS, WHAT WOULD THAT NUMBER BE?

The single most important value determinant for most companies is its Free Cash Flow (FCF) because FCF is how owners pay themselves dividends and pay down debt. If you could know a second fact about the company before estimating its value you would want to know how quickly its FCF is growing.

Walk me through the three financial statements.

The three financial statements are the Income statement Balance sheet Cash flow statement The income statement shows the profitability of the company. It begins with the revenue line and after subtracting various expenses arrives at net income. The income statement covers a specified period like quarter or year. Unlike the income statement, the balance sheet does not account for the entire period and rather is a snapshot of the company at a specific point in time such as the end of the quarter or year. The balance sheet shows the company's resources (assets) and funding for those resources (liabilities and stockholder's equity). Assets must always equal the sum of liabilities and equity. Lastly, the statement of cash flows is a magnification of the cash account on the balance sheet and accounts for the entire period reconciling the beginning of period to end-of-period cash balance. It typically begins with net income and is then adjusted for various non-cash items and working capital changes to arrive at cash from operations. Cash from investing and financing activities are then added to cash flow from operations to arrive at net change in cash for the year.

Walk me through a cash flow statement (CFS).

There are two methods by which cash flow statements are organized: Direct and Indirect. The most common approach is the indirect method, whereby the cash flow statement is broken out into 3 sections: Cash from operating activities Cash from investing activities Cash from financing activities Together they add up to the net change in cash during the period. Cash from operating activities starts with net income and adds back non-cash expenses like depreciation and amortization, stock based compensation as well as changes in working capital to arrive at cash flow from operations. Cash from investing activities captures capital expenditures and other investing activities like purchases of intangible assets or financial investments. Lastly, cash from financing activities captures cash inflows from borrowing and stock issuances and outflows from dividends, debt repayment and share repurchases.

Do accounts receivable get captured on the income statement?

There is no accounts receivable line on the income statement, but it does get captured, if only partially, and indirectly in revenue. Specifically, revenue is recognized on the income statement during a period, regardless of whether cash was received. That means that a portion of the revenue line on the income statement will reflect accounts receivable. That's why the other two financial statements are better for understanding what is happening to accounts receivable. Specifically, the cash flow statement reconciles revenue to cash revenue while the absolute balance of accounts receivable can be observed on the balance sheet.

Do inventories get captured on the income statement?

There is no inventory line on the income statement, but it does get captured, if only partially, and indirectly in cost of goods sold (and potentially other operating expenses). For example, COGS is recognized on the income statement during a period, regardless of whether the associated inventory was purchased during the same period. That means that a portion of the COGS line on the income statement will likely reflect a portion of inventory used up. That's why the other two financial statements are better for understanding what is happening to inventory. Specifically, the cash flow statement shows the year-over-year changes in inventory, while the absolute balance of beginning and end-of-period inventory can be observed on the balance sheet.

What's more important: the income statement or the cash flow statement?

They are both important and any serious analysis requires using both. However, I would think that the cash flow is slightly more important because it reconciles net income, the accrual-based bottom line on the income statement to what's happening to cash, while also showing you the critical movement of cash during the period. Without the cash flow statement, I can only see what's happening from an accrual profitability standpoint. The cash flow statement on the other hand can alert me to any liquidity issues, as well as any other major investments or financial activities that do not hit the income statement. The one situation in which I would prefer the income statement is if I also have the beginning and end-of-year balance sheet. That's because I could reconcile the cash flow statement simply by looking at the balance sheet year over changes along with the income statement. Similar question: If you have a balance sheet and had to choose either the income statement or the cash flow statement, which would you choose? As long as I have a beginning and end-of-period balance sheet, I would choose the income statement because I could recreate the cash flow statement using the balance sheet year-over-year changes along with the income statement.

How can a profitable firm go bankrupt?

To be profitable, a company must generate revenues that exceed expenses. However, if the company is ineffective at collecting cash from customers and allows its receivables to balloon, or if it is unable to get favorable terms from suppliers and must pay cash for all inventories and supplies, what can occur is that despite a profitable income statement, the company suffers from liquidity problems due to the timing mismatch of cash inflows and outflows. While reliably profitable companies who simply have these working capital issues can usually secure financing to deal with it, theoretically, if financing becomes unavailable for some reason (the 2008 credit crisis is an example where even profitable companies couldn't secure financing), even a profitable company could be forced to declare bankruptcy.

How do the 3 financial statements link together? Assume the Indirect Method for the Cash Flow Statement.

To link the statements, make Net Income at the bottom of the Income Statement the top line of the Cash Flow Statement. Then, adjust this Net Income number for any non-cash items such as Depreciation & Amortization. Next, reflect changes to operational Balance Sheet items such as Accounts Receivable, which may increase or decrease the company's cash flow depending on how they've changed. That gets you to Cash Flow from Operations. Next, reflect investing and financing activities, which may increase or decrease cash flow, and sum up Cash Flow from Operations, Investing, and Financing to get the net change in cash at the bottom. Link Cash on the Balance Sheet to the ending Cash number on the CFS, and add Net Income to Retained Earnings within Equity on the Balance Sheet. Then, link each non-cash adjustment to the appropriate Asset or Liability; SUBTRACT links on the Assets side and ADD links on the L&E side. Link each CFI and CFF item to the matching item on the Balance Sheet, using the same rule as above. Check that Assets equals Liabilities + Equity at the end; if this is not true, you did something wrong and need to re-check your work.

Can companies amortize goodwill?

Under GAAP, public companies are not allowed to amortize goodwill. Instead, it must be tested annually for impairment. Note: This is usually a fine place to stop. However, for those comfortable with the accounting can add: The longer answer is that under GAAP, public companies are not allowed to amortize goodwill and must instead test it annually for impairment. However, private companies may elect to amortize goodwill. In addition, for tax reporting purposes, goodwill may be amortized over 15 years under some circumstances.

How do operating leases affect the three financial statements?

Under US GAAP, companies can choose to account for leases as operating or capital leases. Operating leases primarily only impact the income statement. When leases are accounted for as operating leases, lease (rent) payments are treated as operating expenses like wages and utilities: Regardless of whether you sign a 1-year lease or a 30-year lease, every time you pay the rent, cash is credited and an operating expense is debited. The only significant balance sheet impacts have to do with timing differences between payments (prepaid and accrued rent) and the matching of rent payments to when the tenant benefits from that rent (leading to balance sheet accruals for smoothing of rent escalations and upfront rent incentives like a free month). Starting in 2019, operating leases will no longer be allowed under US GAAP.

What are the financial statements you'll typically find in a 10K?

You will find an income statement, cash flow statement, and balance sheet. Those are the three core financial statements. In addition, companies also include a statement of shareholders' equity and statement of comprehensive income.