Anna Kim

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Accounting

• Anna Kim
• Director of Fundraising
• Kur Robin
• President
• Mutual Investment Club of Cornell

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Key Accounting Concepts

• Assets Liabilities Equity
• Accrual Accounting
• Expenses are recorded in the time they are
  incurred not the time they are paid
• Revenue is recognized when the service is
  provided not when the cash is actually received
• As a result of accrual accounting net income over
  a given period is not equal to the change in a
  companies cash flows

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Key Income Statement Terms

• Net revenue / net sales
• Cost of Goods Sold (COGS)
• Gross Profit (Revenue COGS)
• Selling, General Administrative (SGA)
• Research Development (RD)
• Depreciation (D)
• Amortization (A)
• Operating Income
• Interest Income
• Interest Expense
• Taxes
• Net Income (NI)

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Key Cash Flow Statement Terms

• Operating Cash Flow (OCF) cash generated by the
  operations of a firms
• Financing Cash Flow cash flow generated by
  financing activities such as loans or dividend
  payments
• Investing Cash Flow cash flow generated from
  investing activities such as the buying or
  selling of buildings and equipment

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Key Balance Sheet Terms

• Current Assets (CA) cash and other assets
  which can be turned into cash within a year
• Net PPE Book value of all property plant and
  equipment
• Goodwill Value of the firm that cannot be
  assigned to tangible object
• Current Liabilities (CL) obligations which the
  firm must cover within a year
• Retained Earnings (RE) the accumulated value of
  all of the earnings that the firm has chosen to
  reinvest in the firm (REe Initial Retained
  Earnings Net Income Dividends paid

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• Lets have a look at the real financial
  statements.
• Example

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Balance Sheet - Assets
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Balance Sheet Liabilities Equity
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Income Statement
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Operating Investing Cash Flow
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Financing Cash Flow
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Accounting Finance Terms

• EBIT (Earnings Before Interest and Taxes) used
  as proxy for operating income
• EBITDA (Earnings Before Interest, Taxes,
  Depreciation and Amortization) used as proxy
  for operating cash flow
• FCF (Free Cash Flow)
• CAPEX (Capital Expenditures)
• EPS (Earning Per Share)
• Net Working Capital (CA CL)

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Free Cash Flow Valuation

• FCF EBIT (1 tax rate) Depreciation
  Capital Expenditures Increase NWC

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Quiz

• Question Can EBIT be used for any company?
• Question Which accounting metric (EBIT, EBITDA,
  NI) is utilized by the following groups and why?
• Creditors
• Shareholders

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Customize your analysis

• EBIT is not a proxy for operating income for
  financial services companies because interest
  income is the major income for those commercial
  banks
• Firms pay their obligations in order of priority
  so operating obligations are paid first then
  loans and bonds and finally shareholders
• As a result creditors are interested in EBITDA
• Shareholders are interested in Net Income
• To have an accurate analysis of the companies,
  you need to
• Tailor your analysis and modify the ratios
• Adjust the reported items according to the
  business model of the company

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Earnings Growth

• P/E Price/Earnings
• Stock Price / EPS
• Market Cap / Net Income
• PEG P/E / Earnings Growth
• Divide P/E ratio by estimated growth in EPS
• Based on Comps, but generally less than 1 is good

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Return on Capital

• ROS Profit Margin
• Net Profit After Taxes / Revenue
• ROA Return on Assets
• Net Profit After Taxes / Total Assets
• ROE Return on Equity
• Net Profit After Taxes / Shareholder Equity

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Other Comps

• Price / Book How aggressively the market values
  the firm
• Price / Cash Flow Actual cash as compared to NI
  (which can be influenced by companys accounting)
• Price / Sales If company not yet profitable

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Solvency Ratios

• Quick Ratio Cash Accts Receivable / Total
  Current Liabilities
• Ability to cover debts in crisis
• Current Ratio Total CA / Total CL
• Margin of safety for slightly longer time period
• Fixed Assets / SE
• Smaller Better Measures liquidity

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Efficiency Ratios

• Collection Period AR x 365 / Revenue
• Avg. days to collect AR
• Turnover Revenue / Average Inventory
• How quickly they move products, and how it
  translates into
• AP x 365 / Revenue
• How long it takes to repay suppliers
• Affects credit

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Questions?