What concept does the balance sheet really explain by looking at the information contained in it quizlet?

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Below are the 2014 and 2015 year-end balance sheets for Tran Enterprises:

Assets: 2015 2014
Cash $ 200,000 $ 170,000
Accounts receivable 864,000 700,000
Inventories 2,000,000 1,400,000
Total current assets $3,064,000 $2,270,000
Net fixed assets 6,000,000 5,600,000
Total assets $9,064,000 $7,870,000

Liabilities and equity:

Accounts payable $1,400,000 $1,090,000
Notes payable to bank 1,600,000 1,800,000
Total current liabilities $3,000,000 $2,890,000
Long-term debt 2,400,000 2,400,000
Common stock 3,000,000 2,000,000
Retained earnings 664,000 580,000
Total common equity $3,664,000 $2,580,000
Total liabilities and equity $9,064,000 $7,870,000

The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2014. As of the end of 2015, none of the principal on this debt had been repaid. Assume that the company's sales in 2014 and 2015 were the same. Which of the following statements must be CORRECT?
a. The firm issued long-term debt in 2015.
b. The firm repurchased some common stock in 2015.
c. The firm increased its short-term bank debt in 2015.
d. The firm issued new common stock in 2015.
e. The firm had negative net income in 2015.

For this question, confirm that the accrued compensation is now being recognized as an expense (as opposed to just changing non-accrued to accrued compensation).
Assuming that's the case, Operating Expenses on the Income Statement go up by $10, Pre-Tax Income falls by $10, and Net Income falls by $6 (assuming a 40% tax rate).
On the Cash Flow Statement, Net Income is down by $6, and Accrued Compensation will increase Cash Flow by $10, so overall Cash Flow from Operations is up by $4 and the Net Change in Cash at the bottom is up by $4.
On the Balance Sheet, Cash is up by $4 as a result, so Assets are up by $4. On the Liabilities & Equity side, Accrued Compensation is a liability so Liabilities are up by $10 and Retained Earnings are down by $6 due to the Net Income, so both sides balance.

After a year has passed, Apple must pay interest expense and must record the depreciation.
Operating Income would decrease by $10 due to the 10% depreciation charge each year, and the $10 in additional Interest Expense would decrease the Pre-Tax Income by $20 altogether ($10 from the depreciation and $10 from Interest Expense).
Assuming a tax rate of 40%, Net Income would fall by $12.
On the Cash Flow Statement, Net Income at the top is down by $12. Depreciation is a non-cash expense, so you add it back and the end result is that Cash Flow from Operations is down by $2.
That's the only change on the Cash Flow Statement, so overall Cash is down by $2.
On the Balance Sheet, under Assets, Cash is down by $2 and PP&E is down by $10 due to the depreciation, so overall Assets are down by $12.
On the other side, since Net Income was down by $12, Shareholders' Equity is also down by $12 and both sides balance.
Remember, the debt number under Liabilities does not change since we've assumed none of the debt is actually paid back.

After 2 years, the value of the factories is now $80 if we go with the 10% depreciation per year assumption. It is this $80 that we will write down in the 3 statements.
First, on the Income Statement, the $80 write-down shows up in the Pre-Tax Income line. With a 40% tax rate, Net Income declines by $48.
On the Cash Flow Statement, Net Income is down by $48 but the write-down is a non- cash expense, so we add it back - and therefore Cash Flow from Operations increases by $32.
There are no changes under Cash Flow from Investing, but under Cash Flow from Financing there is a $100 charge for the loan payback - so Cash Flow from Investing falls by $100.
Overall, the Net Change in Cash falls by $68.
On the Balance Sheet, Cash is now down by $68 and PP&E is down by $80, so Assets have decreased by $148 altogether.
On the other side, Debt is down $100 since it was paid off, and since Net Income was down by $48, Shareholders' Equity is down by $48 as well. Altogether, Liabilities & Shareholders' Equity are down by $148 and both sides balance.

First, on the Income Statement, the $100 write-down shows up in the Pre-Tax Income line. With a 40% tax rate, Net Income declines by $60.
On the Cash Flow Statement, Net Income is down by $60 but the write-down is a non- cash expense, so we add it back - and therefore Cash Flow from Operations increases by $40.
Overall, the Net Change in Cash rises by $40. On the Balance Sheet, Cash is now up by $40 and an asset is down by $100 (it's not clear which asset since the question never stated the specific asset to write-down). Overall, the Assets side is down by $60.
On the other side, since Net Income was down by $60, Shareholders' Equity is also down by $60 - and both sides balance.

To do a true bottoms-up build, you start with each different department of a company, the # of employees in each, the average salary, bonuses, and benefits, and then make assumptions on those going forward.
Usually you assume that the number of employees is tied to revenue, and then you assume growth rates for salary, bonuses, benefits, and other metrics.
Cost of Goods Sold should be tied directly to Revenue and each "unit" produced should incur an expense.
Other items such as rent, Capital Expenditures, and miscellaneous expenses are either linked to the company's internal plans for building expansion plans (if they have them), or to Revenue for a more simple model.

The Statement of Cash Flows is one of the three financial reports that all public companies are required by the SEC to produce on a quarterly basis. (Most non-public companies also produce Cash Flow (CF) Statements.) The CF Statement comprises the three main components described below, showing all the company's sources and uses of cash. Since companies tend to use accrual accounting, a company's net income may not (and most of the time does not) portray how much cash is actually flowing in or out due to non-cash expenses, investing activities, financing activities, changes in working capital, etc. Because of this, even profitable companies may have trouble managing their cash flows, and non-profitable companies may be able to survive without raising outside capital.
Cash from Operations - Cash generated or lost through normal operations, sales, and changes in working capital (more detail on working capital below).

Cash from Investing - Cash generated or spent on investing activities; may include, for example, capital expenditures (use of cash) or asset sales (source of cash). This section will also show any investments in the financial markets and operating subsidiaries. Note: This section can explain a large negative cash flow during the reporting period, which isn't necessarily a bad thing if it is due a large capital expenditure in preparation for future growth.

Cash from Financing - Cash
generated or spent on financing the business; may include proceeds from debt or equity issuance (source of cash) or cost of debt or equity repurchase (use of cash).

The three components of the Cash Flows Statement are Cash from Operations, Cash from Investing, and Cash from Financing.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a good metric for evaluating a company's profitability. It is sometimes used as a proxy for free cash flow because it will allow you to determine how much cash is available from operations to pay interest, capital expenditures, etc.
EBITDA is one of the most important single items someone will look at in evaluating a Company.
EBITDA = Revenues - Expenses (excluding interest, taxes, depreciation, and amortization)
A very common valuation methodology is the EV/EBITDA multiple, which estimates the Enterprise Value of a company using a multiple of its EBITDA.7 An EV/EBITDA multiple is probably the most commonly used "quick and dirty" valuation multiple used by investment banks, private equity firms, hedge funds, etc.
Another use of EBITDA is the calculation of a company's leverage ratio (Total Debt/EBITDA) and interest coverage ratios (Total Interest/EBITDA). These ratios are used for comparing companies based on their amount of debt compared with the amount of cash they are generating that can service the interest on their debt.

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a good high-level indicator of a company's financial performance. Since it removes the effects of financing and accounting decisions such as interest and depreciation, it's a good way to compare the performance of different companies. It serves as a rough estimate of free cash flow, and is used in the EV/EBITDA multiple to quickly establish a company's high-level valuation.

Enterprise Value is the value of an entire firm, both debt and equity, according to the equation below. This is the price that would be paid for a company in the event of an acquisition.
Enterprise Value is the value of a firm as a whole, to both debt and equity holders. To calculate Enterprise Value in its simplest form, you take the market value of equity (aka the company's market cap), add the debt and the value of outstanding preferred stock, add the value of any minority interests the company owns, and then subtract the cash the company currently holds.
Note: This is a highly simplified Enterprise Value formula. When bankers working on a deal are calculating the true Enterprise Value in an acquisition, they must take into account numerous other factors such as leases, pension obligations, and NOLs.

EV= MVE + Debt + Preffered Stock + Minority Interest - Cash

Valuation is the procedure of calculating the worth of an asset, security, company, etc.
This is one of the primary tasks that investment bankers do for their clients. Investment bankers are hired to value a company, often in the context of purchasing another company, selling itself or divesting a division.
Investment bankers use valuation in pitch books and other presentations to guide clients toward what they should expect.
Private equity firms, hedge funds, asset managers, and others engage in valuation techniques to determine which assets are undervalued, how much to pay for an asset, etc.
Valuation is the procedure of calculating the worth of an asset, security, company, etc.

Comparable Companies/Multiples Analysis (to calculate either Enterprise Value or Equity Value)
o Most often an analyst will take the average multiple from comparable companies (based on size, industry, etc) and use that multiple with the operating metric of the company being valued
o The most commonly used multiple is Enterprise Value/EBITDA
o Other multiples analysts will use include Price/Earnings, PEG, EV/EBIT, Price/Book, EV/Sales o Some industry-specific multiples include:
EV/EBITDAR (companies with significant rent/lease expense) EV/Proven Reserves, EV/Production (energy)
EV/Visitors (Internet)
o Different multiples may be more or less appropriate for specific industries, and some multiples calculate Equity Value, while others calculate Enterprise Value. For example, if you use an EV/EBITDA multiple, you would be calculating the total value of the firm, including debt, since you are using a metric that excludes interest expense. If you were to use a multiple such as P/E (price/earnings) ratio, you would be valuing only the equity because the metric is earnings, which hypothetically could be distributed through dividends to those who own the firm's equity.
o Example: Comparable Company A is trading at an EV/EBITDA multiple of 6.0x, and the company you are valuing has EBITDA of $100 million; your company's EV would be valued at $600 million based on this valuation technique.8

This is one of the most common questions in investment banking interviews. Don't mess it up!
To begin, project free cash flows for a specified period, usually five to ten years. Free cash flow is equal to EBIT (earnings before interest and taxes) multiplied by (1-the tax rate) plus (depreciation and amortization) minus capital expenditures minus the change in net working capital.
Next, predict free cash flows for the years beyond the five or ten years projected. This requires establishment of a terminal value, as is detailed in the next question below.
Once future cash flows have been projected, calculate the present value of those cash flows. First, establish an appropriate discount rate—the Weighted Average Cost of Capital, or WACC. This calculation is discussed in the following two questions.
To find the present values of the cash flows (which is equal to the company's Enterprise Value), we discount them by the WACC, as follows.
The final cash flow (CFn) in the analysis will be the sum of the terminal value calculation and the final year's free cash flow.
For a much more in depth description of a Discounted Cash Flow analysis, view a DCF tutorial online (Investopedia is a great resource) and study the Excel model you received when you purchased this guide.
First, project the company's free cash flows for about 5 years using the standard formula.( Free cash flow is EBIT times 1 minus the tax rate, plus Depreciation and Amortization, minus Capital Expenditures, minus the Change in Net Working Capital.) Next, predict free cash flows beyond 5 years using either a terminal value multiple or the perpetuity method. To calculate the perpetuity, establish a terminal growth rate, usually about the rate of inflation or GDP growth, a low single-digit percentage. Now multiply the Year 5 cash flow by 1 plus the growth rate and divide that by your discount rate minus the growth rate. Your discount rate is the Weighted Average Cost of Capital, or WACC. Use that rate to discount all your cash flows back to year zero. The sum of the present values of all those cash flows is the estimated present Enterprise Value of the firm according to a discounted cash flow model.

To establish a terminal value, either you can use the formula above, which is the perpetuity growth methodology, or you can use the terminal multiple method.
In the terminal multiple method, you assign a valuation multiple (such as EV/EBITDA) to the final year's projection, and use that as the "terminal value" of the firm.
In either case, you must remember to discount this "cash flow" back to year zero as you have with all other cash flows in the DCF model.
There are two ways to calculate terminal value. The first is the terminal multiple method. To use this method, you choose an operation metric (most commonly EBITDA) and apply a comparable company's multiple to that number from the final year of projections. The second method is the perpetuity growth method where you choose a modest growth rate, usually just a bit higher than the inflation rate or GDP growth rate, and assume that the company can grow at this rate infinitely. You then multiply the FCF from the final year by 1 plus the growth rate, and divide that number by the discount rate (WACC) minus the assumed growth rate.

Normally this will occur when a customer pays for a good or service to be delivered in the future.
Some examples would be annual magazine subscriptions, annual contracts on cell phone service, online dating site memberships, etc.
The revenue is not recognized until the good or service is delivered to the customer. Until it is delivered, it is recorded as deferred revenue (liability) on the Balance Sheet.
It will be recognized as revenue as it is delivered, and the deferred revenue line item on the Balance Sheet will be reduced accordingly.
This typically occurs when a company is paid in advance for future delivery of a good or service, such as a magazine subscription. If a customer pays for delivery of 12 months of magazines in advance, cash from that purchase goes onto the Balance Sheet as cash, but also increases deferred revenue, a liability. As each issue is delivered to the customer over the course of the year, the deferred revenue line item will go down, reducing the company's liability, while a portion of the subscription payment will be recorded as revenue.

A company may finance itself using multiple layers of debt and equity, each of which will have a different cost and repayment preference in the event of bankruptcy. The paragraph below would be a relatively good answer, and the chart that follows illustrates the different layers of the capital structure.
A company's capital structure is made up of debt and equity, and there may be multiple levels of each. Debt can be senior, mezzanine, or subordinated, with senior being paid off first in the event of bankruptcy, then mezzanine, then subordinated. Since senior debt is most secure and will be paid off first in bankruptcy, it offers the lowest interest rate. The most senior debt is bank loans; the rest is bonds, which can be issued to the general public. Equity is either preferred or common stock. Preferred stock combines some features of both debt and equity: it can appreciate in value, and also pays out a consistent dividend but it has very little or no rights in a bankruptcy. Common stock is traded on the exchanges, if the company is public. In the event of bankruptcy, common stockholders have the least claim to assets in the event of liquidation, and therefore they bear the highest level of risk and earn the highest return on investment. Common shareholders are the company's owners and are entitled to profits, which may be reinvested in the business or paid as dividends.

Many people would think that having excess cash on hand is not a bad thing. While it is good to have a cash buffer (especially in a time of economic turmoil), holding too much cash means you are giving up potential earnings from investing that cash elsewhere.
A firm must be aware of its cash needs, and keep enough cash to cover itself in the event of a downturn, but excess cash should be used or invested.
A growing company will normally reinvest its cash in the operations of the business itself. This allows the company to expand and grow. This could be an investment in equipment, more employees, new offices, increased/upgraded marketing, etc.
A company could also pay out the excess earnings as additional salary or bonuses to its employees or a dividend to its shareholders.
An option to preserve some sense of liquidity would be investing in short-term CDs, allowing the firm to earn interest while locking up the investment for only a short time.
Other options include investing in other companies, buying out a competitor, supplier or distributor, paying off debt, repurchasing stock, expanding to new markets, etc.
Although it seems like having a lot of cash on hand might be a good thing, especially in a recession, it really isn't, because there is an opportunity cost to holding cash. A company should have enough cash to protect itself from bankruptcy in a downturn, but any excess cash should be put to work. The company could pay a dividend to its equity holders or bonuses to employees, although a growing company will tend to reinvest rather than pay out cash. It can reinvest its cash in plants, equipment, personnel, or marketing; it can pay off debt, repurchase equity, or buy out a competitor, supplier, or distributor. If nothing else, that cash can earn a little something invested in CDs until it can be put to better use.

Goodwill is a line item in the assets section of a company's Balance Sheet.
Goodwill can arise from an acquisition where the price paid for the firm being acquired is higher than the tangible assets being purchased. The difference between the price paid and the firm's book value would be accounted for in the "goodwill" section of the Balance Sheet.
Goodwill represents intangible assets such as brand name, customer relationships, intellectual property, etc.
If something happens that impairs the goodwill of the firm (such as a patent running out, an event hurting the brand, etc.), goodwill must be "written down" as an expense on the Income Statement.
Impairment of goodwill affects net income in much the same way depreciation does. It is accounted for as an expense, just like depreciation is an expense, even though the company is not physically paying out cash to cover this expense.
Goodwill is an intangible asset included on a company's Balance Sheet. Goodwill may include things like intellectual property rights, brand name, or customer relations. Goodwill is acquired when purchasing a firm if the acquirer pays more than the book value of its assets. When something occurs to diminish the value of the intangible assets, goodwill must be "written down" in a process much like that for depreciation. Goodwill is subtracted as a non-cash expense and therefore reduces net income.

Cash based accounting: This form of accounting recognizes revenues and expenses as of the time cash is actually collected or disbursed. For example, if a company receives a payment on a credit card, it wouldn't be recorded as revenue until the credit card company actually deposits the money into the company's bank account.
Accrual accounting: With accrual accounting, as soon as the company makes a payment or sale and believes it will pay for or be paid for a good or service, it will recognize the expense or revenue. Using the prior example, if the company is using accrual accounting, they will book the revenue as soon as they are paid, and it will show up as an accounts receivable on the Balance Sheet until the money is actually deposited into their account, at which time the accounts receivable balance will go down and the cash balance will go up.
With cash-based accounting, a company won't recognize expenses or revenues until the cash is actually disbursed or collected. With accrual accounting, a company will recognize expenses and revenues when it has entered into a transaction or agreement that will require it to pay or be paid, even if cash won't change hands until sometime in the future. Most companies use accrual accounting since credit cards are so prevalent.

LIFO and FIFO are different ways of keeping track of inventory value and cost of goods sold.
LIFO (Last In First Out): With the LIFO accounting policy, a company assigns the value of the most recently purchased/produced goods to the first sale. For example, if a company built 5 widgets for $5 and then built 5 widgets for $10, the value of their inventory would be $75. The first 5 widgets they sell will have a $10 COGS and will reduce inventory by $10 each, and the last 5 widgets will have a $5 COGS and will reduce inventory by $5 each.
FIFO (First in First Out): With the FIFO accounting policy, a company assigns to the first sale the value of goods built or purchased first. For example, if a company built 5 widgets for $5 and then built 5 widgets for $10, the value of their inventory would be $75. The first 5 widgets they sell will have a $5 COGS and will reduce inventory by $5 each, and the last 5 widgets will have a $10 COGS and will reduce inventory by $10 each.
LIFO and FIFO are different methods of dealing with inventory and COGS in a company's accounting policy. With LIFO, the last inventory produced or purchased will be the first to be recognized when goods are sold. With FIFO, the first inventory produced or purchased will be the first recognized when goods are sold.

In an inflationary environment, the cost of goods includes the less expensive items while ending inventory includes the more expensive items. This means that the net income and ending inventory amounts are higher under the FIFO method. However, in a deflationary environment, the FIFO method is likely to generate lower net income.

Liquidity is how freely an asset or security can be bought and sold on the open markets.
o Money market accounts, publicly traded large cap stocks and bonds, ETF's, and open-ended mutual funds are very liquid.
o Micro-cap stocks, bonds, loans, or investments in privately-owned companies could be considered relatively illiquid due to the limited market for them.
Liquidity also describes how quickly an asset can be converted into cash.
o Cash itself is the most liquid asset.
o A large pharmaceutical production plant is not a very liquid asset because it would take the owner of the plant a long time to sell the plant and convert it into usable cash.
A more liquid investment is relatively safer, all else equal, since the investor can sell it at any time.
Liquidity is how easily an asset can be bought and sold by an investor. Some examples of liquid assets include money market accounts and large-cap stocks. Some non-liquid assets include many micro-cap stocks, or a large, specialized factory or production plant that could take years to convert into cash.

What concept does the balance sheet really explain by looking at the information contained in it?

What concept does the balance sheet really explain quizlet?

What information is contained on the balance sheet quizlet?

What is concept of balance sheet?