Building the Cash Flow Statement (Video + Excel Template)
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EBITDA: Understand the Most Important Metric in Finance
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Accrual Accounting 101 (U.S. GAAP Guide)
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Working Capital 101 (Guide + Excel Template)
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Stock Based Compensation (Advanced Accounting Topic)
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Accounting Interview Questions
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Profit and Loss Statement (P&L)
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Balance Sheet Primer
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All Accounting Content
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A/P Days
A/P DaysWhat is A/P Days? A/P Days counts the average number of days it takes for a company to fulfill an invoice from suppliers or vendors for orders placed using credit.
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A/R Days
A/R DaysWhat is A/R Days? The A/R Days measures the approximate number of days in which a company needs to retrieve cash from customers that paid using credit.
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Accounting Equation
Accounting EquationWhat is the Accounting Equation? The Accounting Equation is a fundamental principle stating that a company’s assets (i.e. resources) must always be equal to the sum of its liabilities and equity...
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Accounting Rate of Return
Accounting Rate of ReturnWhat is Accounting Rate of Return? The Accounting Rate of Return (ARR) is the average net income earned on an investment (e.g. a fixed asset purchase), expressed as a percentage of its average book va...
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Accounts Payable (A/P)
Accounts Payable (A/P)What is Accounts Payable? Accounts Payable (A/P) is defined as the total unpaid bills owed to suppliers and vendors for products/services already received but were paid for on credit as opposed to cas...
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Accounts Receivable (A/R)
Accounts Receivable (A/R)What is Accounts Receivable? Accounts Receivable (A/R) is defined as payments owed to a company by its customers for products and/or services already delivered to them – i.e. an “IOU” from...
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Accrual
AccrualWhat are Accruals? Accruals describe revenues earned and expenses incurred on the income statement, irrespective of whether cash was actually received or paid by the company.
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Accrual Accounting vs. Cash-Basis Accounting
Accrual Accounting vs. Cash-Basis AccountingWhat is Accrual Accounting vs. Cash-Basis Accounting? Under accrual accounting, revenue is recognized once earned and expenses are recorded post-invoice, whereas cash-basis accounting recognizes reven...
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Accrued Expense vs. Accounts Payable
Accrued Expense vs. Accounts PayableWhat is Accrued Expense vs. Accounts Payable? Accrued Expense and Accounts Payable each refer to unfulfilled 3rd party payments, but for accrued expenses, an invoice has not been received yet.
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Accrued Expenses
Accrued ExpensesWhat are Accrued Expenses? Accrued Expenses refer to a company’s incurred expenses related to employee wages or utilities yet to be paid off in cash — often due to the invoice not yet being rece...
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Accrued Wages
Accrued WagesWhat are Accrued Wages? Accrued Wages represent the unmet employee compensation remaining at the end of a reporting period, i.e. the balance of unfulfilled payroll expenses. The expense is recognized...
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Accumulated Deficit
Accumulated DeficitWhat is an Accumulated Deficit? The Accumulated Deficit line item arises when a company’s cumulative profits to date have become negative, which most often stems from either sustained accounting losse...
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Accumulated Depreciation
Accumulated DepreciationWhat is Accumulated Depreciation? Accumulated Depreciation reflects the cumulative reduction in the carrying value of a fixed asset (PP&E) since the date of initial purchase. Once purchased, PP...
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Additional Paid-In Capital (APIC)
Additional Paid-In Capital (APIC)What is Additional Paid-In Capital? Additional Paid-In Capital (APIC) represents the value received in excess of the par value from issuances of preferred or common shares.
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Adjusted EBITDA
Adjusted EBITDAWhat is Adjusted EBITDA? Adjusted EBITDA is a non-GAAP profit metric determined by the discretionary add-backs dictated by a company’s management team. While many add-backs are broadly accepted,...
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Adjusted EBITDA Margin
Adjusted EBITDA MarginWhat is Adjusted EBITDA Margin? The Adjusted EBITDA Margin (%) measures the core operating profitability of a company on a normalized basis, i.e. inclusive of only items related to core business activ...
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Allowance for Doubtful Accounts
Allowance for Doubtful AccountsWhat is Allowance for Doubtful Accounts? The Allowance for Doubtful Accounts is a contra-asset account that estimates the future losses incurred from uncollectible accounts receivable (A/R).
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Amortization of Intangible Assets
Amortization of Intangible AssetsWhat is Amortization of Intangible Assets? The Amortization of Intangible Assets is the process in which purchases of non-physical intangibles are incrementally expensed across their appropriate usefu...
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Annual Income
Annual IncomeWhat is Annual Income? Annual Income, or yearly income”, refers to the total earnings generated by an individual or corporation over a twelve-month period, i.e. one full year. The gross annual i...
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Annual Report
Annual ReportWhat is the Annual Report? The two terms, Annual Report and Form 10-K, are often used interchangeably – however, the annual report is more marketing-oriented for shareholders whereas the 10-K is a tec...
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ASC 606
ASC 606What is ASC 606? ASC 606 is the revenue recognition standard established by FASB and the IASB that governs how revenue generated by public and private companies is recorded on their financial statemen...
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Assets
AssetsWhat are Assets? Assets are resources with positive economic value that can either be sold for money if liquidated or be used to generate future monetary benefits.
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Bad Debt
Bad DebtWhat is Bad Debt? Bad Debt refers to a company’s outstanding receivables that were determined to be uncollectible and are thereby treated as a write-off on its balance sheet.
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Balance Sheet Guide
Balance Sheet GuideWhat is the Balance Sheet? The Balance Sheet, one of the core financial statements, provides a snapshot of a company’s assets, liabilities and shareholders’ equity at a specific point in t...
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Basic Earnings Power Ratio
Basic Earnings Power RatioWhat is Basic Earnings Power Ratio? The Basic Earnings Power Ratio determines the efficiency at which a company utilizes its assets to produce operating income (EBIT).
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Basic EPS
Basic EPSWhat is Basic EPS? Basic Earnings Per Share (EPS) is a measure of profitability representing the amount of net profit allocatable to each share of common stock outstanding. Since basic EPS is denoted...
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Bonds Payable
Bonds PayableWhat are Bonds Payable? Bonds Payable are a form of debt financing issued by corporations, governments, and other entities in order to raise capital. As part of the financing arrangement, the issuer o...
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Book Value of Equity (BVE)
Book Value of Equity (BVE)What is Book Value of Equity? The Book Value of Equity (BVE) is the amount received by the common shareholders of a company if all of its balance sheet assets were to be hypothetically liquidated. In...
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Book Value Per Share (BVPS)
Book Value Per Share (BVPS)What is the Book Value Per Share? Book Value Per Share (BVPS) refers to the per-share value of equity on an accrual accounting basis that belongs to the common shareholders of a company.
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Capex to Cash Flow Ratio
Capex to Cash Flow RatioWhat is Capex to Cash Flow Ratio? The Capex to Cash Flow Ratio (%) represents the percentage of a company’s operating cash flow (OCF) allocated towards the purchase of long-term fixed assets, i....
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Capex vs. Opex
Capex vs. OpexWhat is Capex vs. Opex? The distinction between Capex vs. Opex comes down to the intent behind the spending and the timing of the resulting benefits, which has broad implications on the recognition po...
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Capital Acquisition Ratio
Capital Acquisition RatioWhat is Capital Acquisition Ratio? The Capital Acquisition Ratio measures a company’s capacity to fund its capital expenditures (Capex) requirements using its internal sources of cash, i.e. oper...
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Capital Expenditures (Capex)
Capital Expenditures (Capex)What is Capex? Capex stands for “capital expenditures” and refers to the investments made by a company into long-term assets to help facilitate growth. For the vast majority of companies,...
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Capital Lease
Capital LeaseWhat is a Capital Lease? A Capital Lease represents a long-term contractual agreement, where a company (i.e. the lessee) can rent a fixed asset such as PP&E from another party (i.e. the lessor) fo...
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Capital Turnover
Capital TurnoverWhat is Capital Turnover? Capital Turnover is a financial ratio that measures the efficiency at which a company can utilize its equity funding to generate sales.
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Capitalize vs. Expense
Capitalize vs. ExpenseWhen to Capitalize vs. Expense a Cost? The Capitalize vs Expense accounting treatment decision is determined by an item’s useful life assumption. Costs expected to provide long-lasting benefits...
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Capitalized Software Costs
Capitalized Software CostsWhat are Capitalized Software Costs? Capitalized Software Costs are costs such as programmer compensation, software testing and other direct and indirect overhead costs that are capitalized on a compa...
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Cash and Cash Equivalents
Cash and Cash EquivalentsWhat is “Cash and Cash Equivalents”? Cash and Cash Equivalents is a categorization on the balance sheet consisting of cash and current assets with high liquidity (i.e. assets convertible i...
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Cash EPS
Cash EPSWhat is Cash EPS? The Cash EPS is a non-GAAP profitability ratio that compares a company’s operating cash flow (OCF) to its diluted weighted average number of shares outstanding.
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Cash Flow from Financing Activities (CFF)
Cash Flow from Financing Activities (CFF)What is Cash Flow from Financing Activities? Cash Flow from Financing Activities tracks the net change in cash related to raising capital (e.g. equity, debt), share repurchases, dividends, and repayme...
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Cash Flow from Investing Activities (CFI)
Cash Flow from Investing Activities (CFI)What is Cash Flow from Investing Activities? Cash Flow from Investing Activities accounts for purchases of long-term assets, namely capital expenditures (Capex) — as well as business acquisitions or d...
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Cash Flow from Operating Activities (CFO)
Cash Flow from Operating Activities (CFO)What is Cash Flow from Operating Activities? Cash Flow from Operating Activities represents the total amount of cash generated from operating activities throughout a specified period.
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Cash Flow Statement (CFS)
Cash Flow Statement (CFS)What is a Cash Flow Statement? The Cash Flow Statement tracks the real inflows and outflows of cash from operating, investing and financing activities over a specified period of time.
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Cash Flow Statement (Part 1)
Cash Flow Statement (Part 1)Learn the Building Blocks of the Cash Flow Statement In this video, we'll build a cash flow statement model given an income statement and balance sheet in Excel. The accounting here is a simplified pr...
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Cash Flow Statement (Part 2)
Cash Flow Statement (Part 2)Learn the building blocks of a financial model In this video, we'll build a cash flow statement given an income statement and balance sheet in Excel. The accounting here is a simplified presentation o...
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Cash Ratio
Cash RatioWhat is the Cash Ratio? The Cash Ratio compares a company’s cash and cash equivalents to its current liabilities and short-term debt obligations with upcoming maturity dates.
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Certificate of Deposit (CD)
Certificate of Deposit (CD)What is a Certificate of Deposit? A Certificate of Deposit (CD) offers higher interest rates than traditional savings accounts in exchange for restricting the access to the funds.
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Change in Net Working Capital (NWC)
Change in Net Working Capital (NWC)What is Change in Net Working Capital? The Change in Net Working Capital (NWC) section of the cash flow statement tracks the net change in operating assets and operating liabilities across a specified...
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COGS Margin
COGS MarginWhat is COGS Margin? The COGS Margin is the ratio between a company’s cost of goods sold and revenue, expressed in the form of a percentage.
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Collateral
CollateralWhat is Collateral? Collateral is an item of value that borrowers can pledge to lenders to obtain a loan or a line of credit. Oftentimes, lenders require borrowers to offer collateral as part of the l...
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Conservatism Principle
Conservatism PrincipleWhat is the Conservatism Principle? The Conservatism Principle states that gains should be recorded only if their occurrence is certain, but all potential losses, even those with a remote chance of in...
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Contra Account
Contra AccountWhat is Contra Account? A Contra Account carries a balance (i.e. debit or credit) that offsets the normal account, thereby reducing the paired account’s value.
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Contra Liability Account
Contra Liability AccountWhat is a Contra Liability? A Contra Liability carries a debit balance rather than a credit balance, which is the opposite of the normal balance carried by liabilities. Liabilities are typically recor...
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Contribution Margin Ratio
Contribution Margin RatioWhat is Contribution Margin Ratio? The Contribution Margin Ratio (%) represents the product revenue remaining after deducting all variable costs, expressed on a per-unit basis.
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Cost of Goods Manufactured (COGM)
Cost of Goods Manufactured (COGM)What is the Cost of Goods Manufactured (COGM)? The Cost of Goods Manufactured (COGM) represents the total costs incurred in the process of converting raw material into finished goods. The COGM formula...
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Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS)What is Cost of Goods Sold (COGS)? Cost of Goods Sold (COGS), otherwise known as the “cost of sales”, refer to the direct costs incurred by a company while selling its goods/services.
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Cost of Goods Sold vs. Operating Expenses
Cost of Goods Sold vs. Operating ExpensesWhat is Cost of Goods Sold vs. Operating Expenses? Cost of Goods Sold vs. Operating Expenses is that COGS are direct costs from selling products/services while OpEx refers to indirect costs.
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Cost Structure
Cost StructureWhat is Cost Structure? The Cost Structure of a business model is defined as the composition of fixed costs and variable costs within the total costs incurred by a company.
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Credit Sales
Credit SalesWhat is Credit Sales? Credit Sales refer to the revenue earned by a company from its products or services, where the customer paid using credit rather than cash. The gross credit sales metric neglects...
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Current Assets
Current AssetsWhat are Current Assets? The Current Assets categorization on the balance sheet represents assets that can be consumed, sold, or used within one calendar year.
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Debt Schedule
Debt ScheduleWhat is a Debt Schedule? A Debt Schedule is used to keep track of all outstanding debt balances and related payments, namely mandatory principal amortization and interest expense. Not only does the de...
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Debt to Tangible Net Worth
Debt to Tangible Net WorthWhat is Debt to Tangible Net Worth? Debt to Tangible Net Worth is a credit ratio that compares a company’s total debt outstanding relative to the value of its total assets minus intangible asset...
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Deferral
DeferralWhat is a Deferral? A Deferral refers to revenue that was received before delivery of the product or service to the customer, as well as expenses paid in advance. The recognition of a deferral results...
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Deferred Revenue
Deferred RevenueWhat is Deferred Revenue? Deferred Revenue (or “unearned” revenue) is created when a company receives cash payment in advance for goods or services not yet delivered to the customer.
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Deferred Tax Liability (DTL)
Deferred Tax Liability (DTL)What is a Deferred Tax Liability? A Deferred Tax Liability (DTL) stems from temporary timing differences between the taxes recorded under book (U.S. GAAP) and tax accounting, where the actual amount o...
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Deferred Taxes
Deferred TaxesDeferred taxes: A common "problem area" I want to briefly focus on deferred taxes because it's a topic that pops up quite frequently in our public modeling and valuation seminars, as well as our corpo...
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Depreciable Cost
Depreciable CostWhat is Depreciable Cost? The Depreciable Cost is the cost basis of the depreciation expense following a capital expenditure (Capex).
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Depreciation Schedule
Depreciation ScheduleWhat is Depreciation? Depreciation is an expense that reduces the value of a fixed asset (PP&E) based on a useful life and salvage value assumption. On the income statement, depreciation is record...
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Depreciation Tax Shield
Depreciation Tax ShieldWhat is the Depreciation Tax Shield? The Depreciation Tax Shield refers to the tax savings caused from recording depreciation expense. On the income statement, depreciation reduces a company’s earning...
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Diluted EPS
Diluted EPSWhat is Diluted EPS? Diluted Earnings Per Share (EPS) measures the residual net profits distributable to each share of total common equity outstanding. Unlike the basic EPS metric, the calculation of...
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Direct vs. Indirect Costs
Direct vs. Indirect CostsWhat are Direct vs. Indirect Costs? Direct Costs can be traced back to its specific product offerings, whereas Indirect Costs cannot as these types of costs are not directly tied to production.
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Discontinued Operations
Discontinued OperationsWhat are Discontinued Operations? The Discontinued Operations line item on the income statement represents the parts of a company that were either divested or shut down (i.e. classified as held-for-sa...
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Dividend Per Share (DPS)
Dividend Per Share (DPS)What is Dividend Per Share? Dividend Per Share (DPS) represents the total dividend amount issued by a company on a per-share basis, most often using annualized figures.
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Dividends Payable
Dividends PayableWhat are Dividends Payable? Dividends Payable are classified as a current liability on the balance sheet since they represent declared payments to shareholders that are generally fulfilled within one...
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Double Declining Balance Method (DDB)
Double Declining Balance Method (DDB)What is the Double Declining Balance Method? The Double Declining Balance Method (DDB) is a form of accelerated depreciation in which the annual depreciation expense is greater during the earlier stag...
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Double Entry Bookkeeping
Double Entry BookkeepingWhat is Double Entry Bookkeeping? Double Entry Bookkeeping is a standardized accounting system wherein each and every transaction results in adjustments to at least two offsetting accounts. Each finan...
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Earnings Per Share (EPS)
Earnings Per Share (EPS)What is EPS? Earnings Per Share (EPS) is the ratio between the net profits generated by a company relative to each common share outstanding. Conceptually, the EPS ratio measures the net earnings of a...
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EBIT
EBITWhat is EBIT? EBIT stands for “Earnings Before Interest and Taxes” and measures a company’s operating profitability in a period after COGS and operating expenses are deducted.
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EBITA
EBITAWhat is EBITA? EBITA is a non-GAAP measure of a company’s operating profitability, where the effects of amortization are removed (i.e. a non-cash add back).
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EBITDA
EBITDAWhat is EBITDA? EBITDA stands for “earnings before interest, taxes, depreciation and amortization” and reflects the normalized, pre-tax cash flows generated by a company’s core business activiti...
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EBITDA Coverage Ratio
EBITDA Coverage RatioWhat is EBITDA Coverage Ratio? The EBITDA Coverage Ratio measures a company’s capacity to meet its interest payments by comparing its EBITDA against its interest burden.
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EBITDA vs. Cash Flow
EBITDA vs. Cash FlowWhat is EBITDA vs. Cash Flow? EBITDA is often used as a proxy for cash flow, but many practitioners struggle to grasp the true meaning of EBITDA fully. There are misconceptions surrounding the usage o...
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EBITDAR
EBITDARWhat is EBITDAR? EBITDAR is a non-GAAP measure of operating profitability prior to capital structure decisions, tax rates, non-cash expenses like D&A, and rent costs.
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Effective Tax Rate
Effective Tax RateWhat is Effective Tax Rate? The Effective Tax Rate represents the percentage of a corporation’s pre-tax income that was actually paid out in the form of taxes.
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Effective vs Marginal Tax Rates
Effective vs Marginal Tax RatesQ: Can you please explain the difference between effective tax rate and marginal tax rate? A: Marginal tax rate refers to the rate that is applied to the last dollar of a company's taxable income, bas...
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Fair Market Value (FMV)
Fair Market Value (FMV)What is Fair Market Value? The Fair Market Value (FMV) refers to the current price that an interested buyer in the open market is willing to pay to purchase a certain asset.
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FCF Margin
FCF MarginWhat is FCF Margin? The FCF Margin is a company’s operating cash flow minus its capital expenditures in a specified period, expressed as a percentage of revenue.
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FIFO vs. LIFO
FIFO vs. LIFOWhat is FIFO vs. LIFO? FIFO and LIFO are two methods of accounting for inventory purchases, or more specifically, for estimating the value of inventory sold in a given period.
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Financial Statement Linkages
Financial Statement LinkagesHow are the Financial Statements Linked? Under accrual accounting, the three financial statements consist of the income statement, balance sheet, and cash flow statement, each closely interlinked with...
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Fixed Assets
Fixed AssetsWhat are Fixed Assets? Fixed Assets are resources expected to provide long-term economic benefits that are expected to be fully realized by the company across more than twelve months.
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Form 10-K Filing
Form 10-K FilingWhat is Form 10-K Filing? The Form 10-K Filing is the comprehensive, annual report required to be filed with the SEC for all publicly-traded companies based in the U.S.
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Form 10-Q Filing
Form 10-Q FilingWhat is Form 10-Q? The Form 10-Q is the quarterly report required to be filed with the SEC that, compared to the 10-K, is far less comprehensive as the financials are prioritized.
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Form 8-K
Form 8-KWhat is Form 8-K Filing? The Form 8-K, or “current report,” is a required filing with the SEC when a company undergoes a materially significant event.
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Full Disclosure Principle
Full Disclosure PrincipleWhat is the Full Disclosure Principle? The Full Disclosure Principle requires companies to report their financial statements and disclose all material information.
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Full Time Equivalent (FTE)
Full Time Equivalent (FTE)What is FTE? FTE, an abbreviation for “full time equivalent”, represents a unit of measurement standardized to equal the number of hours worked by the typical full-time employee. The full time equival...
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Going Concern Assumption
Going Concern AssumptionWhat is Going Concern? The Going Concern Assumption is a fundamental principle in accrual accounting stating that a company will remain operating into the foreseeable future, rather than undergo a liq...
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Goodwill Accounting
Goodwill AccountingGoodwill Accounting Guidelines Goodwill represents the excess of purchase price over the fair market value of a company’s net assets: If a business is simply a collection of assets, why would an acqui...
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Goodwill Amortization
Goodwill AmortizationWhat is Goodwill Amortization? Goodwill Amortization is an option only available to private companies, while public companies can instead perform annual tests for impairment.
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Gross Income
Gross IncomeWhat is Gross Income? Gross Income represents an individual’s total annual earnings prior to any deductions or taxes paid to the government. In the case of a business, gross income, or “gross pr...
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Gross Sales
Gross SalesWhat is Gross Sales? Gross Sales are defined as a company’s total revenue generated from all transactions that occurred over a specified period before any deductions such as returns, discounts, and al...
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Gross vs. Net Revenue
Gross vs. Net RevenueWhat is Gross vs. Net Revenue? Net Revenue (or “net sales”) refers to a company’s gross revenue after adjusting for returns by customers and any incentive discounts.
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Growth Capex vs. Maintenance Capex
Growth Capex vs. Maintenance CapexWhat is Growth Capex vs. Maintenance Capex? Growth Capex consists of the purchase of fixed assets in order to increase its operating cash flows (and valuation) beyond that of historical levels, wherea...
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Historical Cost Principle
Historical Cost PrincipleWhat is the Historical Cost Principle? The Historical Cost Principle requires the carrying value of assets on the balance sheet to be equal to the value on the date of acquisition – i.e. the original...
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Impact of TCJA on the Dividends Received Deduction
Impact of TCJA on the Dividends Received DeductionIn addition to the headline impacts of TCJA, a lesser known change affects dividends received deductions ("DRD"). Dividends received deduction basics As we discuss in detail in our advanced accounting...
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Interest Expense
Interest ExpenseWhat is Interest Expense? Interest Expense represents the periodic costs incurred by a borrower as part of a debt financing arrangement. Conceptually, interest expense is the cost of raising capital i...
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Interest Income
Interest IncomeWhat is Interest Income? Interest Income refers to the earnings generated from a company’s cash balance, typically from interest-bearing bank accounts.
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Inventory
InventoryWhat is Inventory? Inventory refers to the raw materials used by a company to produce goods, unfinished work-in-process (WIP) goods, and finished goods available for sale.
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Inventory Days
Inventory DaysWhat is Inventory Days? Inventory Days measures the average amount of time in which a company’s inventory is held on hand until it is sold.
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Liabilities
LiabilitiesWhat are Liabilities? Liabilities are unsettled obligations to third parties that represent a future cash outflow — or more specifically, the external financing used by a company to fund the purchase...
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Liquidity
LiquidityWhat is Liquidity? Liquidity is defined as the marketability of an asset and the ease at which it can be converted into cash without incurring a substantial monetary loss.
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Long Term Debt (LTD)
Long Term Debt (LTD)What is Long Term Debt? Long Term Debt (LTD) describes a financial obligation with a maturity exceeding one year, i.e. that is not coming due within the next twelve months.
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Mandatory Debt Amortization
Mandatory Debt AmortizationWhat is Mandatory Debt Amortization? Mandatory Debt Amortization is the contractually required repayment of the original principal by a borrower throughout the lending term. Typically required by seni...
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Market to Book Ratio
Market to Book RatioWhat is Market to Book Ratio? The Market to Book Ratio compares a company’s market capitalization, i.e. equity value, to its book value of equity (BVE).
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Marketable Securities
Marketable SecuritiesWhat are Marketable Securities? Marketable Securities are short-term investments with high liquidity that could be sold and be converted into cash quickly (<90 days).
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Matching Principle
Matching PrincipleWhat is the Matching Principle? The Matching Principle states the expenses of a company must be recognized in the same period as when the corresponding revenue was “earned.” Per the matching principle...
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Monthly Cash Flow Forecast Model
Monthly Cash Flow Forecast ModelWhat is a Monthly Cash Flow Forecast Model? The Monthly Cash Flow Forecast Model is a tool for companies to track operating performance in real time and for internal comparisons between projected cash...
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Negative Working Capital
Negative Working CapitalWhat is Negative Working Capital? Negative Working Capital arises when a company’s current operating liabilities exceed the value of its current operating assets on the balance sheet.
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Net Book Value (NBV)
Net Book Value (NBV)What is Net Book Value? The Net Book Value (NBV) describes the carrying value of an asset recorded on a company’s balance sheet for bookkeeping purposes.
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Net Cash Flow
Net Cash FlowWhat is Net Cash Flow? Net Cash Flow is the difference between the money coming in (“inflows”) and the money going out of a company (“outflows”) over a specified period. At the end of the day, all com...
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Net Income
Net IncomeWhat is Net Income? Net Income measures the after-tax earnings of a company that remain once all expenses are deducted, most often reported on either a quarterly or annual basis. The net income profit...
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Net Operating Assets
Net Operating AssetsWhat are Net Operating Assets? Net Operating Assets is the difference between a company’s operating assets necessary to its core operations and its operating liabilities.
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Net Operating Losses (NOLs)
Net Operating Losses (NOLs)What are Net Operating Losses (NOLs)? Net Operating Losses (NOLs) are the tax benefits provided to a company operating at a loss under U.S. GAAP — i.e., if the company’s taxable income is negati...
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Net Working Capital (NWC)
Net Working Capital (NWC)What is Net Working Capital? Net Working Capital (NWC) measures a company’s liquidity by comparing its operating current assets to its operating current liabilities.
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Non-Controlling Interest (NCI)
Non-Controlling Interest (NCI)What is Non-Controlling Interest? Non-Controlling Interest (NCI) is the share of equity ownership not attributable to an acquirer with a controlling stake (>50%) in the underlying equity of an inte...
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Non-Current Liabilities
Non-Current LiabilitiesWhat are Non-Current Liabilities? Non-Current Liabilities, also known as long-term liabilities, represent a company’s obligations that are not coming due for more than one year.
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Normalized EBITDA
Normalized EBITDAWhat is Normalized EBITDA? Normalized EBITDA measures the operating cash flow generated by a company’s core business activities with discretionary adjustments to remove the effects of non-recurring it...
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Notes Payable
Notes PayableWhat is Notes Payable? Notes Payable is a written promissory note stating a borrower’s payment obligation to a lender along with the associated borrowing terms (e.g. interest, maturity date).
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Operating Assets
Operating AssetsWhat are Operating Assets? Operating Assets are necessary to a company’s ongoing core operations and directly support the continued generation of revenue and profits.
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Operating Cash Flow (OCF)
Operating Cash Flow (OCF)What is Operating Cash Flow? Operating Cash Flow (OCF) measures the net cash generated from the core operations of a company within a specified time period.
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Operating Cash Flow Ratio
Operating Cash Flow RatioWhat is Operating Cash Flow Ratio? The Operating Cash Flow Ratio (OCF) compares the cash flows generated by a company’s core operations to its current liabilities.
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Operating Expenses
Operating ExpensesWhat are Operating Expenses? Operating Expenses (OpEx) represent the indirect costs incurred by a business to continue running its day-to-day operations. While not directly tied to the revenue generat...
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Operating Income
Operating IncomeWhat is Operating Income? The Operating Income metric represents the profitability of a company’s core operating activities over a specified time period. The operating income of a company is determine...
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Operating Working Capital (OWC)
Operating Working Capital (OWC)What is Operating Working Capital? Operating Working Capital (OWC) measures the current assets and current liabilities used as part of a company’s core, day-to-day operations. Notably, cash and cash e...
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Original Issue Discount (OID)
Original Issue Discount (OID)What is an OID? An Original Issue Discount (OID) refers to a feature of debt financing in which the issuance price is less than the stated redemption price.
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Other Comprehensive Income (OCI)
Other Comprehensive Income (OCI)What is Other Comprehensive Income (OCI)? Other Comprehensive Income (OCI) refers to any revenues, expenses, and gains / (losses) that not have yet been realized. These items, such as a company’...
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Overhead Costs
Overhead CostsWhat are Overhead Costs? Overhead Costs represent the ongoing, indirect expenses incurred by a business as part of its day-to-day operations. An overhead cost is a recurring expense necessary to suppo...
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P/FCF Multiple
P/FCF MultipleWhat is P/FCF? The P/FCF multiple compares a company’s equity value (i.e. market capitalization) relative to its free cash flow to equity (FCFE), or levered free cash flow.
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Payables vs. Receivables
Payables vs. ReceivablesWhat is Payables vs. Receivables? Payables represents a company’s unmet payment obligations to suppliers/vendors, whereas receivables refers to the cash owed from customers for products and serv...
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Pre Tax Income (EBT)
Pre Tax Income (EBT)What is Pre Tax Income? Pre Tax Income, or earnings before taxes (EBT), refers to the remaining earnings once all operating and non-operating expenses, except for taxes, have been accounted for.
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Preferred Shares vs. Common Shares
Preferred Shares vs. Common SharesWhat is Preferred Shares vs. Common Shares? Preferred Shares and Common Shares represent two distinct equity issuance classifications that represent partial ownership in companies. Otherwise referred...
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Prepaid Expenses
Prepaid ExpensesWhat are Prepaid Expenses? Prepaid Expenses refer to payments made in advance for products or services expected to be received on a later date — most often related to utilities, insurance, and rent.
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Profit and Loss Statement (P&L)
Profit and Loss Statement (P&L)What is Profit and Loss Statement? The Profit and Loss Statement (P&L) is a financial statement that starts with revenue and deducts costs and expenses to arrive at net income, the profitability o...
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Profitability Ratio
Profitability RatioWhat is Profitability Ratio? A Profitability Ratio compares a profit measure to revenue to determine the remaining profits after certain types of expenses are deducted. Profitability ratios are standa...
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Property, Plant and Equipment (PP&E)
Property, Plant and Equipment (PP&E)What is PP&E? Property, Plant, and Equipment (PP&E) refers to a company’s tangible fixed assets that are expected to provide positive economic benefits over the long term (> 12 months...
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Quality of Earnings Ratio (QoE)
Quality of Earnings Ratio (QoE)What is Quality of Earnings Ratio? The Quality of Earnings Ratio (QoE) is a profitability ratio that can determine the reliability of a company’s reported net income.
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Research and Development (R&D)
Research and Development (R&D)What is R&D? The Research and Development (R&D) expense refers to spending related to funding internal initiatives around introducing new products or further developing their existing offering...
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Residual Income (RI)
Residual Income (RI)What is Residual Income? Residual Income measures the excess net operating income earned over the required rate of return on a company’s operating assets.
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Restricted Cash
Restricted CashWhat is Restricted Cash? Restricted Cash refers to cash reserved by a company for a specified purpose and is thereby not readily available for use (e.g. fund working capital spending, capital expendit...
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Restricted Stock Units (RSUs)
Restricted Stock Units (RSUs)What are Restricted Stock Units? Restricted Stock Units (RSUs) are a form of stock-based compensation granted by employers to align the incentives of their employees with that of their equity sharehol...
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Retained Earnings
Retained EarningsWhat are Retained Earnings? Retained Earnings measures the total accumulated profits kept by the company to date since inception, which were not issued as dividends to shareholders. The discretionary...
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Revenue Recognition Principle
Revenue Recognition PrincipleWhat is the Revenue Recognition Principle? Under the Revenue Recognition Principle, revenue must be recorded in the period when the product or service was delivered (i.e. “earned”) – whether or not ca...
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Revolver
RevolverWhat is Revolver? In most 3-statement models, the revolving credit line, or “revolver”, acts as a plug to ensure that debt automatically gets drawn to handle projected losses. Cash does the same thing...
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Salvage Value
Salvage ValueWhat is Salvage Value? The Salvage Value refers to the residual value of an asset at the end of its useful life assumption, after accounting for total depreciation.
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SEC EDGAR
SEC EDGARWhat is SEC EDGAR? A basic prerequisite for building a financial statement model (also called a 3-statement model) is access to company filings that contain historical financial data. In the United St...
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Semi-Variable Cost
Semi-Variable CostWhat is a Semi-Variable Cost? A Semi-Variable Cost is comprised of a fixed amount incurred irrespective of production volume, as well as a variable component that fluctuates based on output.
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SG&A Expense
SG&A ExpenseWhat is SG&A? SG&A, or “selling, general and administrative” describes the expenses incurred by a company not directly tied to generating revenue. Unlike a company’s cost of...
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SG&A Margin
SG&A MarginWhat is SG&A Margin? The SG&A Margin is the ratio between a company’s selling, general and administrative costs and net revenue in a given period, expressed as a percentage.
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Shareholders Equity
Shareholders EquityWhat is Shareholders Equity? Shareholders Equity is the difference between a company’s assets and liabilities and represents the remaining value if all assets were liquidated and outstanding deb...
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Shares Outstanding
Shares OutstandingWhat are Shares Outstanding? Shares Outstanding represent all of the units of ownership issued by a company, excluding any shares repurchased by the issuer (i.e. treasury stock).
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Solvency
SolvencyWhat is Solvency? Solvency is a term implying that a company can meet its long-term financial obligations on time and continue operating as a “going concern”.
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Statement of Owner’s Equity
Statement of Owner’s EquityWhat is the Statement of Owner’s Equity? The Statement of Owner’s Equity tracks the changes in the value of all equity accounts attributable to a company’s shareholders and impacts the ending sharehol...
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Stock Based Compensation
Stock Based CompensationWhat is Stock Based Compensation? Under US GAAP, stock based compensation (SBC) is recognized as a non-cash expense on the income statement. Specifically, SBC expense is an operating expense (just lik...
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Stock Based Compensation (SBC)
Stock Based Compensation (SBC)What is Stock Based Compensation (SBC)? Q: I was just told that it is common in the software industry to exclude stock-based compensation (SBC) expense from earnings per share (EPS), effectively treat...
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Stock Based Compensation in DCFs
Stock Based Compensation in DCFsA recent SeekingAlpha blog post questioned Amazon management's definition of free cash flows (FCF) and criticized its application in DCF valuation. The author's thesis is that Amazon stock is overval...
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Stock Turnover Ratio
Stock Turnover RatioWhat is Stock Turnover Ratio? The Stock Turnover Ratio determines the frequency at which a company must replace its inventory on hand over a given time horizon.
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Straight Line Depreciation
Straight Line DepreciationWhat is Straight Line Depreciation? Straight Line Depreciation is the reduction of a long-term asset’s value in equal installments across its useful life assumption.
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Tangible Book Value (TBV)
Tangible Book Value (TBV)What is Tangible Book Value? The Tangible Book Value (TBV) represents the value of a company’s tangible assets, net of any intangible assets such as goodwill.
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Treasury Stock
Treasury StockWhat is Treasury Stock? Treasury Stock represents shares that were issued and traded in the open markets but are later reacquired by the company to decrease the number of shares in public circulation.
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Unearned Revenue
Unearned RevenueWhat is Unearned Revenue? Unearned Revenue refers to customer payments collected by a company before the actual delivery of the product or service.
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Units of Production Method
Units of Production MethodWhat is the Units of Production Method? Under the Units of Production Method, the depreciation expense incurred by a company is contingent on the actual usage of the fixed assets. Therefore, the amoun...
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US GAAP vs. IFRS
US GAAP vs. IFRSWhat is the Difference Between US GAAP vs. IFRS? US GAAP and IFRS are the two predominant accounting standards used by public companies, but there are differences in financial reporting guidelines to...
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Useful Life
Useful LifeWhat is Useful Life? The Useful Life of an asset represents the estimated number of periods in which it will continue to provide economic utility to a company.
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Wages Payable
Wages PayableWhat are Wages Payable? Wages Payable, or “accrued wages”, represent the unmet payment obligations owed to employees remaining at the end of a reporting period. On the balance sheet, accru...
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Weighted Average Shares Outstanding
Weighted Average Shares OutstandingWhat is Weighted Average Shares Outstanding? The Weighted Average Shares Outstanding represents a company’s normalized, time-weighted common share count across a specified period of time.
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Work in Progress (WIP)
Work in Progress (WIP)What is Work in Progress? Work in Progress (WIP) represents incomplete goods still in the production process, i.e. the manufacturing stage between raw materials and finished goods.
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Working Capital
Working CapitalWhat is Working Capital? Working Capital refers to a specific subset of balance sheet items and is calculated by subtracting current liabilities from current assets.
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