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comp accounts. Cheat Sheet (DRAFT) by

composition of fin. account structures.

This is a draft cheat sheet. It is a work in progress and is not finished yet.

b/s

'snapshot' of a business' assets, liabil­ities and equity at a single point in time
 
assets: (resources the company owns and uses)
 
current assets: cash and other assets espected to be turned into cash within next 12 months (short­-term)
→ cash → accounts receivable → prepaid expenses
non-cu­rrent: things company needs to run the business (long-­term)
→ tangible (can touch) → intangible (can't touch)
 
liabil­ities (money owed to others)
current liabil­ities: everything expected to be paid within the next 12 months
→ accounts payable → taxes payable → accrued expenses → deferred revenue
 
non-cu­rrent liabil­ities:
→ long-term loans/debt
 
equity: (diffe­rence between assets and liabil­ities, what is leftover after all assets & paying all obliga­tions)
→ common stock (capital contri­but­ions, money invested in business by owners)
other compre­hensive income (OCI): foreign currency hedge gains and losses, cash flow hedge gains and losses, and unrealised gains and losses for securities that are available for sale.
retained earnings (accum­ulated profits held for future use)

income statement

summary of a business revenues and expenses over a period of time.
 
revenue
product sales, services rendered
 
expenses
direct (cost of services, cogs) increase in direct proportion to sales made
 
 
indirect variable costs (loosely correlate with business' sales however cant be traced back to production of goods or provision of services)
 
advert­ising, comiss­ions, utilities
 
 
indirect fixed (overhead expenses)
 
rent, salaries, insurance, admin, legal, accoun­ting, marketing, deprec­ation, amorti­sation (bare no correl­ation to the sales business made)
 
operating profit (EBIT)
interest and expenses and tax fall below operating profit
 
gross profit margin
how effici­ently the business is producing and selling their products
most important on profit and loss/ income statement is net cash provided by operating activities*

p/e

p/e = net income (profit) - dividends / average outsta­nding shares of common stock

free cash flow (fcf)

the money a company has left over after paying its operating expenses (OpEx) and capital expend­itures (CapEx).
the more free cash flow a company has, the more it can allocate to dividends, paying down debt, and growth opport­uni­ties.*

d/e

<1:
safe
1-1.5:
general good
2 or higher:
high
 
technology and a lot of r&d:
2 and below
large manufa­cturing and publicly traded:
between 2 - 5
banking and finance based business':
10 - 20 is fairly common
anything above 5 or 6 = problem*
  

core principles

assets (stuff a business owns) = liabil­ities (for third parties) + equity (for owners) (stuff that a business owes)
 
adjusted trial balance: bookke­eping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal.

important metrics

- fixed assets
- profit and loss account reserve + security in b/s
- amount of debt
- >10% EBITDA margin (10-14% is benchmark)

trouble

company voluntary agreement (CVA)
high amount of owners draw
using mark to market (MTM) for real life assets and static business contracts
nature of the business sector should be taken into consid­eration*

big 3

- income statement (p&l)
- balance sheet
- cash flow statement
- statement of owners equity / statement of retained earnings

boosting cash efficiency

- reducing the cost base
- divestment
- outsou­­rcing = contra­­cting tasks to external companies
- offshoring = relocating business process to another country
- cost accounting
- purchasing power parity (PPP)
- promissory notes

detecting financial fraud in accounts

- aggressive accounting / creative accounting
- income smoothing
- earnings management
- accounts payable (invoices, ghost companies, round numbers)
- listing inventory and receiv­ables as one line item (inventory + receiv­ables)
- multiple restat­ements are a problem
- cumulative adjust­ments instead of restat­ements
- use of Non-GAAP measures is bad
- be wary of EBITDA
- cooking the books = falsifying accounts
- off-book accounts
- round tripping
 
- overst­ating revenues by recording future expected sales
- inflating an asset's net worth by knowingly failing to apply an approp­riate deprec­iation schedule
- concealing obliga­tions and/or liabil­ities from a company's balance sheet
- Incorr­ectly disclosing relate­d-party transa­ctions and structured finance deals
- accounting anomalies, such as growing revenues without a corres­ponding growth in cash flows.
- a signif­icant surge in a company's perfor­mance within the final reporting period of a fiscal year.
- consistent sales growth while compet­itors are strugg­ling.
- deprec­iation methods and estimates of assets' useful life that don't correspond to those of the overall industry.
- weak internal corporate govern­ance, which increases the likelihood of financial statement fraud occurring unchecked.
- outsized frequency of complex third-­party transa­ctions, many of which do not add tangible value, and can be used to conceal balance sheet debt.
- the sudden replac­ement of an auditor resulting in missing paperwork.
- a dispro­por­tionate amount of management compen­sation derived from bonuses based on short-term targets, which incent­ivises fraud.
- using SPEs to conceal debts taken on from other loan providers and leaving it off the balance sheet
alteration of a companies financial statements to manipulate a company's apparent health or to conceal profits or losses.*


vertical analysis takes every item in the income statement as a percentage of revenue and comparing the year-o­ver­-year trends that could be a potential flag cause of concern.*

horizontal analysis represents financial inform­ation as a percentage of the base years' figures.*


one must always take into consid­eration that audits DO NOT find fraud*
  

ideals

excellent working capital management
 
negative cash conversion cycle: inventory sold before we have to pay for it.
normal to low debt ratio
high liquidity
Positive NPV > Negative NPV
things to take into consid­eration

cash is a liability*

good forma

- The more deals you look at, the better deals you do
- Risk management is key
- Interest + Taxes are an expense you get deprec­iation by laying out money ahead of time (worse kind of expense) due to buying an asset first and get the deduction later
- Offset with IP and avoidable taxable events

calculus

EBITDA margin = measure of a company's operating profit as a percentage of its revenue.
EBITDA margin = ebitda / total revenue
EBITDA = Measure of earnings potential of a business
EBITDA = I + Deprec­iation + Amorti­sation (where I = Operating Income)
EBIT = Operating Profit
operating profit­/income = gross profit - operating expenses
gross profit = revenue - direct costs
net profit = operating profit or EBIT - tax
debt Ratio = If assets where financed debt or own money (if high bad)
non-cu­rrent term debt/net income: (2-4 years good)

covariant

revenue produced by services arm > product revenue.

certified financial statement (cfs)

financial statements audited and certified by external, indepe­ndent accoun­tants.

models

beneish Model evaluates eight ratios to determine the likelihood of earnings manipu­lation, including asset quality, deprec­iation, gross margin, and leverage. After combining the variables into the model, an M-score is calcul­ated. A value greater than -2.22 warrants further invest­iga­tion, while an M-score less than -2.22 suggests that the company is not a manipu­lator.
 
benford's Law states "­1" tends to occur more frequently as the first digit than other digits, providing a non-un­iform distri­bution pattern. (not strict mathem­atical rule / limita­tions - data charac­ter­istics and sample size) should be used in conjun­ction with other models

shareh­olders equity v shareh­olders reserves

shareh­olders' equity is the total ownership interest in a company
shareh­olders' reserves (retained earnings) is one of the components of this equity.
other compon­ents, like common stock and additional paid-in capital, also contribute to the overall shareh­olders' equity. shareh­olders' reserves specif­ically focus on the accumu­lated profits that have not been distri­buted to shareh­olders.*

cost of revenue (cor)

the total of all costs incurred directly in producing, marketing, and distri­buting the products and services of a company to customers.

cost of goods (cogs)

direct costs incurred in producing or acquiring goods, including the cost of raw materials, cost of labor, and manufa­ctu­ring.

sg&a expense

all the costs of running a business that are not related to the production of the business' good or service.
selling expenses
general expenses
admin expenses
sales and marketing (s&m)
rent and utilities
salaries of employees
advert­ising
office supplies, technology costs, and equipment
accoun­tants and it profes­sionals
travel costs (in-person selling, trade shows)
insurance
legal and consulting fees
selling, general and admin (sg&a) is expend­iture due to supporting the business.*