IB Prep

Acquisitions of businesses (CFS)

A common line on the Cash Flow Statement. It measures the net amount of cash a company spent to acquire other companies. The cash-flow statement reflects the cash paid for the entire subsidiary -- not just goodwill. Any part of the purchase price for the subsidiary that was paid for using cash is recorded as a negative amount on the investing activities section in the year of the acquisition.

Contact Asset (BS)

A contract asset is recognized when an entity has satisfied a performance obligation but cannot recognize a receivable until other obligations are satisfied. While a contract asset represents a right to payment that is conditional on further performance, a receivable represents an unconditional right to payment.

Deferred Income Tax (BS)

A deferred income tax is a liability recorded on a balance sheet resulting from a difference in income recognition between tax laws and the company accounting methods. For this reason, the company's payable income tax may not equate to the total tax expense reported. Deferred income taxes are taxes that will eventually pay on its taxable income. Any taxes that are payable under the relevant accounting framework, but which are not yet payable under local tax regulations are recorded as a tax liability on a company's balance sheet until such time as they are paid. A company may use straight-line depreciation to record the depreciation on its fixed assets, but is allowed by tax regulations to use an accelerated depreciation in its tax return. The result is less taxable income reported on the corporate tax return, which is caused by the increased amount of depreciation expense in the current period. Thus, the company pays fewer income taxes in the current period, even though a higher income tax is indicated in its normal income statement. In later years, when the amount of straight-line depreciation recognized catches up with the amount of accelerated depreciation, the amount of deferred income taxes related to this it will be reduced to zero. Accelerated depreciation is any method of depreciation where the business depreciates a greater portion of an asset's value earlier in its life. Net PPE=Gross PPE+Capital Expenditures−AD where: AD=Accumulated depreciation

Payroll Expense (BS)

A payroll tax is a percentage withheld from an employee's pay by an employer who pays it to the government on the employee's behalf. In the U.S., payroll taxes are used to fund SS and Medicare.

Income Tax Expense (IS)

A tax expense is a liability owed to federal, state/provisional, and/or municipal governments within a given period , typically over the course of a year. Tax expenses are calculated by multiplying the appropriate tax rate of an individual or business by the income received or generated before taxes, after factoring in such variables as non-deductible items, tax assets, and tax liabilities. Tax Expense = Effective Tax Rate x Taxable Income

Accounts Receivable (BS)

Account receivable is an asset account on the balance sheet that represents money due to a company in the short term Account receivables are created when a company lets a buyer purchase their services on credit The strength of a company's AR can be analyzed with the accounts receivable turnover ratio or day sales outstanding A turnover ratio analysis can be completed to have an expectation of when the AR will actually be received.

Financing Activities (CFS)

CFF is a section of a company's cash flow statement, which shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends. Capital From Debt or Equity: CFF indicates the means through which a company raises cash to maintain or grow its operations. A company's source of capital can be from either debt or equity. When a company takes on debt, it typically does so by issuing bonds or taking a loan from the bank. Either way, it must make interest payments to its bondholders and creditors to compensate them for loaning their money. When a company goes through the equity route, it issues stock to investors who purchase the stock for a share in the company. Some companies make dividend payments to shareholders, which represents a cost of equity for the firm. Positive and Negative CFF: Debt and equity financing are reflected in the cash flow from financing section, which varies with the different capital structures, dividend policies, or debt terms that companies may have. Transactions That Cause Positive Cash Flow From Financing Activities Issuing equity or stock, which is sold to investors Borrowing debt from a creditor or bank Issuing bonds, which is debt that investors purchase A positive number for cash flow from financing activities means more money is flowing into the company than flowing out, which increases the company's assets. Transactions That Cause Negative Cash Flow From Financing Activities Stock repurchases Dividends Paying down debt Negative CFF numbers can mean the company is servicing debt, but can also mean the company is retiring debt or making dividend payments and stock repurchases, which investors might be glad to see.

Investing Activities (CFS)

CFI is one of the sections on the cash flow statement that reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Negative cash flow is often indicative of a company's poor performance. However, negative cash flow from investing activities might be due to significant amounts of cash being invested in the long-term health of the company, such as research and development. Purchase of fixed assets-cash flow negative Purchase of investments such as stocks or securities-cash flow negative Lending money-cash flow negative Sale of fixed assets-cash flow positive Sale of investment securities-cash flow positive Collection of loans and insurance proceeds-cash flow positive

Capital Expenditures (CFS)

CapEx can tell you how much a company invests in existing and new fixed assets to maintain or grow its business. Put differently, CapEx is any type of expense that a company capitalizes or shows on its balance sheet as an investment rather than on its income statement as an expenditure. Capitalizing an asset requires the company to spread the cost of the expenditure over the useful life of the asset. CapEx can be found in the cash flow from investing activities in a company's cash flow statement. Different companies highlight CapEx in a number of ways, and an analyst or investor may see it listed as capital spending, purchases of property, plant, and equipment (PP&E), or acquisition expense. You can also calculate capital expenditures by using data from a company's income statement and balance sheet. On the income statement, find the amount of depreciation expense recorded for the current period. On the balance sheet, locate the current period's property, plant, and equipment line-item balance.

COGS (IS)

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.

Current Assets (BS)

Current assets are all the assets of a company that are expected to be sold or used as a result of standard business operations over the next year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. Current assets are important to businesses because they can be used to fund day-to-day business operations and pay for the ongoing operating expenses.

Current liabilities (BS)

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. Current liabilities are typically settled using current assets, which are assets that are used up within one year. Examples of current liabilities include accounts payable, short-term debt, dividends, and notes payable as well as income tax owed.

Long-Term Debt (BS)

Debt that matures on more than one year. Long-term debt can be viewed from two perspectives: financial statement reporting by the issuer and financial investing. In financial statement reporting, companies must record long-term debt issuance and all of its associated payment obligations on its financial statements. On the flip side, investing in long-term debt includes putting money into debt investments with maturities of more than one year.

Deferred Income Tax Liability (CFS)

Deferred tax liability is created when the Company underpays the tax, which it will have to pay shortly. The liability is created not due to Company defaulting on its tax liabilities but due to timing mismatch or accounting provisions, which cause less tax outgo than required by the Company. An Oil Company, ABC Inc, produces 10,000 barrels of oil at the cost of $ 15 per barrel 1st year. But in the next year, the labor cost increased, and it produced the same amount of oil but at the cost of $ 20. The Company sold the oil at the end of year two but used different accounting treatments for financial and tax purposes. It recorded the cost as $ 150,000 FIFO inventory for the financial balance sheet, where it recorded the cost as $ 200,000 for tax purposes LIFO inventory. It created a temporary difference of $ 50,000, and if the tax rate is 30% would create a tax liability of $ 15,000. Deferred tax impacts the future cash flows for the Company - while deferred tax assets lower the cash outflow, deferred tax liability increases the cash outflow for the Company in the future. Change in deferred tax balances should be analyzed to understand the future course - if the difference will rise or if there will be a reversal in the trend of the deferred taxes. Deferred taxes are prone to the type of business the Company is in. If it's a capital-intensive business and the Company purchases new assets, it will have an increasing deferred tax liability because of accelerated depreciation of the assets. Analysts should look for changes in deferred taxes by reading the footnotes to the financial statements, including information about the warranty, bad debts, write-downs, policy on capitalizing or depreciating assets, policy on amortizing financial assets, revenue recognition policy, etc.

D&A (CFS)

Depreciation does not directly impact the amount of cash flow generated by a business, but it is tax-deductible, and so will reduce the cash outflows related to income taxes. Depreciation is considered a non-cash expense, since it is simply an ongoing charge to the carrying amount of a fixed asset, designed to reduce the recorded cost of the asset over its useful life. When creating a budget for cash flows, depreciation is typically listed as a reduction from expenses, thereby implying that it has no impact on cash flows. Nonetheless, depreciation does have an indirect effect on cash flow. When a company prepares its income tax return, depreciation is listed as an expense, and so reduces the amount of taxable income reported to the government (the situation varies by country). If depreciation is an allowable expense for the purposes of calculating taxable income, then its presence reduces the amount of tax that a company must pay. Thus, depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes. This tax effect can be increased if the government allows a business to use accelerated depreciation methods to increase the amount of depreciation claimed as a taxable expense, which thereby reduces the amount of cash outflow for tax payments even further in the short term (though this leaves less depreciation to claim in later periods, which reduces the favorable tax effect in those periods).

Depreciation in the IS

Depreciation is a non-cash charge on the Income Statement, so an increase of $10 causes Pre-Tax Income to drop by $10 and Net Income to fall by $6, assuming a 40% tax rate. -No-cash charges is a write-down or accounting expense that does not involve a cash payment. Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common non-cash charges that reduce earnings but not cash flows.

Depreciation (BS)

Depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. Depreciation represents how much of an assets they own by paying for them over a certain period of time. The carrying value of an asset after all depreciation has been taken is referred to as its salvage value. -On a balance sheet, cash is up by $4 on the Asset side, but PP&E has declined $10 due to added depreciation, so the assets side is down by $6. On the L&E side, Retained Earnings is down by $6 because of the reduced net income on the income statement, so both sides of the balance sheet are down by $6 and it remains in balance. Retained earnings are profits that a company has earned to date, less any dividends or other distributions paid to investors. A growing company normally avoids dividend payments, so that it can use its retained earnings to fund additional growth of the business in such areas as working capital, capital expenditures, acquisitions, research and development, and marketing.

EBIT (IS)

EBIT is an indicator of a company's profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is a company's net income before income tax expense and interest expenses are deducted.

Goodwill (BS)

Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process. The value of a company's brand name, solid customer base, good customer relations, good employee relations, and proprietary employee relations, and proprietary technology represents some reasons why goodwill exists. Goodwill sort of represent a sort of workaround for accountants. This tends to be necessary because acquisitions typically factor estimates of future cash flows and other considerations that are not known at the time of the acquisition. While this is perhaps not a significant issue, it becomes one when accountants are looking for ways of comparing reported assets or net income between two different companies; some that have previously acquired other companies and some that have not. Goodwill impairment occurs when a company decides to pay more than book value for the acquisition of an asset, and then the value of that asset declines. The difference between the amount that the company paid for the asset and the book value of the asset is goodwill. A company accounts for its goodwill on its balance sheet as an asset. It does not, however, amortize or depreciate the goodwill as it would for a normal asset. Instead, a company needs to check its goodwill for its impairment yearly. If the goodwill asset becomes impaired by a decline in the value of the asset below the purchase price, the company would record a goodwill impairment. This is a signal that the value of the asset ha fallen below the amount that the company originally paid for it. A large amount of goodwill impairment could mean that the company is not making sound investment decisions in physical assets or that it could be paying more for an asset than it should.

CFO (CFS)

Indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers. It is the first section depicted on a company's cash flow statement. Cash flow from operating activities does not include long-term capital expenditures or investment revenue and expense. CFO focuses only on the core business, known as (OCF)

Amortization (BS)

Intangible Assets. Amortization typically refers to the process of writing down the value of either a loan of an intangible asset. Amortization schedules are used by lenders, such as financial institutions, to present a loan repayment schedule based on a specific maturity date. Intangibles are amortized (expensed) over time to tie cost of the asset to the revenues to the revenues it generates, in accordance with the matching principle of generally accepted accounting principles (GAAP). The term "amortization" refers to two situations. First, amortization Is used in the process of paying off debt through regular principal and interests payments over time. An amortization schedule is used to reduce the current balance on a loan—for example, a mortgage or a car loan—through installment payments. Second, amortization can also refer to the practice of spreading out capital expenses related to intangible assets over a specific duration—usually over the asset's useful life. Amortization can also refer to the amortization of intangibles. In this case, amortization is the process of expensing the cost of an intangible asset over the projected life of the asset. It measures the consumption of the value of an intangible asset, such as goodwill, a patent, a trademark, or copyright. When businesses amortize expenses over time, they help tie the cost of using an asset to the revenues that it generates in the same accounting period. For example, a company benefits from the use of a long-term asset over a number of years . Thus, it writes off the expense incrementally over the useful life of that asset.

Inventories (CFS)

Inventory is the goods company purchase for the purpose of reselling, it includes the raw material produce goods available for sale. For manufacturing, there are three types of inventories which include raw material, work in progress, and finished goods. For the trading company, inventory is the goods they purchase to resell. Inventory is the current asset that presents on the company's balance sheet. The inventory that is sold within the accounting period will be classified as "Cost of Goods Sold" in the income statement. What if we purchase inventory on credit, so there is no cash flow. We may sell the inventory on credit, so cash not yet receive too. When we buy or sell inventory on credit, it will impact the Accounts Payable and Accounts Receivable balance. The movement of both accounts also present on the cash flow statement, so they will impact both sides. Inventory increase => Cash Outflow (negative) Inventory decrease => Cash Inflow (positive) ABC company purchase inventory 100,000 at $ 5 per unit. During the year, they sold 30,000 units at $10 per unit to the customers. Assume both purchase and sale transactions are settled immediately. The inventory beginning balance is 40,000 units cost $ 5 per unit. Please show the impact of inventory on the cash flow statement. First, we need to analyze how much cash flow in and out of the company. Company spends $ 500,000 to purchase the inventory (100,000 units x $5/unit) Company earns 300,000 from selling inventory to customers (30,000 units x $10/unit) So in total, company spend $ 200,000 (500,000-300,000) Inventory increase from 40,000 units to 110,000 units at the end of the year. It eqivalent to $ 350,000 [(110,000-40,000) * $5 per unit].

Inventory

Inventory is the raw materials used to produce goods as well as the goods that are available for sale—raw materials, work-in-progress, and finished goods. FILO, LIFO. Inventory management allows businesses to minimize costs as they create or receive goods on an as-needed basis

Net Income

Is calculated as revenues minus expenses, interest, and taxes

Marketable securities (BS)

Marketable securities are assets that can be liquidated to cash quickly. These short-term liquid securities can be bought or sold on a public stock exchange or a public bond exchange, These securities tend to mature in a year or less and can be either debt or equity. Marketable securities include common stock, Treasury bills, and money market instruments, among others. Businesses typically hold cash in their reserves to prepare them for situations on which they may need to act swiftly, such as taking advantage of an acquisition opportunity that comes up or making contingent payments.

PPE (BS)

Non-current assets. Fixed assets Property, plant and equipment, net: Are long-term assets vital to business operations and the long-term financial health of a company. Equipment, machinery, building , and vehicles are all types of PP&E assets. Are also called fixed or tangible assets, meaning they are physical items that a company cannot easily liquidate. Purchases of PP&E are a signal that management has faith in the long term outlook and profitability of its company. Investment analysts and accountants use the PP&E of a company to determine if it is on a sound financial footing and utilizing funds un the most efficient and effective manner. PP&E assets fall under the category of noncurrent assets, which are the long-term investments or assets of a company. Machinery, computers, vehicles, furniture, buildings, land. PP&E is recorded on a company's financial statements, specifically on the balance sheet. PP&E is initially measured according to its historical cost, which is the actual purchase cost and the costs associated with bringing assets to its intended use. For example, when purchasing a building for retail operations, the historical cost could include the purchase price, transaction fees, and any improvements made to the building to bring to its destined use. The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Depreciation is the process of allocating the cost of a tangible asset over its useful life and is used to account for declines in value. The total amount of a company's cost allocated to depreciation expense over time is called accumulated depreciation.

Interest Expense (IS)

Non-operating Income. Interest expense is one of the core expenses found in the income statement. A company must finance its assets either through debt or equity. With the former, the company will incur an expense related to the cost of borrowing. Understanding a Company's interest expense helps understand its capital structure and financial performance. Interest is often found as a separate line item below EBIT. Alternatively, some companies may list interest in the SG&A section, depending on their accounting practices. Most commonly, interest expense out of company borrowing money. However, another transaction that generates interest expense is the use of capital leases. When a firm leases an asset from another company, the lease balance generates an interest expense that appears on the income statement.

Noncurrent Liabilities (BS)

Noncurrent liabilities, also called long-term liabilities or long-term debts, are long-term financial obligations listed on a company's balance sheet. These liabilities have obligations that become due beyond twelve months in the future, as opposed to current liabilities which are short-term debts with maturity dates within the following twelve month period.

Receivables, net (CFS)

On the other hand, accounts receivables refer to cash due to your business for services or goods delivered but not paid. Put differently, these are the outstanding invoices unpaid by customers. It is a short-term line of credit extended to regular customers with an obligation to pay within a set date, often 30, 60, 90, or 120 days Account receivables are cash to your business and a short-term liability to the customer. Your cash flow considerations will determine how long you can allow a customer to go without paying.

Operating Profit (IS)

Operating profit is the net income derived from a company's prime or core business operations. Operating profit is also (wrongfully) referred to as earnings before interest and tax (EBIT), as interest are non-operating expenses. Operating profit does not include non-operating income, but EBIT does. Operating profit eliminates several extraneous and indirect factors that can obscure a company's real performance.

Accounts Payable (BS)

Refer to a company's short-term obligations owed to its creditors or suppliers, which have not yet been paid. Payables appear on a company's balance sheet as a current liability. The sum of all outstanding amounts to vendors is shown as the accounts payable balance on the company's balance sheet. The increase or decrease in total AP from the prior period appears on the cash flow statement. Management may choose to pay its outstanding bills as close to their due dates as possible in order to improve cash flow.

Stockholder's equity (BS)

Stockholder's equity refers to the assets remaining in a business once all liabilities have been settled. This figure is calculated by subtracting total liabilities from total assets; alternatively, it can be calculated by taking the sum of share capital and retained earnings, less treasury stock. This metric is frequently used by analysts and investors to determine a company's general financial health. If equity is positive, the company has enough assets to cover its liabilities. A negative stockholder's equity may indicate an impending bankruptcy.

Taxable Income (IS)

Taxable income is the portion of your gross income used to calculate how much tax you owe in a given year of tax. Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.

Additional paid-in capital (APIC) (BS)

The difference between the par value of a stock and the price that investors will pay for it. To be the "additional" part of paid-in capital, an investor must buy the stock directly from the company during its IPO.

Gross Profit

The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (Sales).

Net Sales (IS)

The result of gross revenue minus applicable sales returns, allowances, and discounts. Costs associated with net sales will affect a company's gross profit and gross profit margin but net sales does not include cost of goods sold which is usually a primary driver of gross profit margins.

Accrued

To accrue means to accumulate overtime—most commonly used when referring to the interest, income, or expense of an individual or business. Interest in a saving account, for example, accrues over time, such that the total amount in that account grows. The term accrue is often related to accrual accounting, which has become the standard accounting practice for most companies.

Accounts Payable (CFS)

When a company purchases supplies, it may not necessarily pay straight away. They may get an allowance of 30, 60, 90, or 120 days before the supplier requires payments. The purchaser records this short-term liability as accounts payable on the balance sheet. For the purchaser, that is akin to a source of cash as it increases cash flow and cash in hand. Although providing longer payment options can harm your cash flow, what if we told you there is a solution that allows you to do that without harming cash flow? Introducing the Resolve net terms management solution. We understand you want to entice valuable customers by providing relaxed payment terms for bulk purchases. Still, you can't always do so because it is such a hassle trying to check a customer's credit history and credit report.

Prepaid Expenses (BS)

Which represent advance payments made by a company for goods and services to be received in the future—are considered current assets. Although they cannot be converted into cash, they are the payments already made.

Contract liability (BS)

an entity's obligation to transfer goods or services to a customer (i) when the customer prepays consideration or (ii) when the customer's consideration is due for goods and services that the entity will yet provide.