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Financial Modeling Class

Financial Statements: Connections

Fall 2019
Bruce Tavel
Financial Statements: Connections
Financial statements are about the movement of cash, goods, and services into and out of a company
• The Income Statement tracks a company’s production and selling activities,
the result is profit / loss over a period of time.
Net Income – the end result – becomes the first line of Cash from Operations on the Cash Flow
Statement.
• The Balance Sheet tracks the company’s assets, its liabilities and shareholder’s equity
at a point in time. It always balances. It is a record for a company’s assets and all the claims against
those assets. The Cash Balance, taken from ending cash on the Cash Flow Statement, is the first
line item on the Balance Sheet.
• The Cash Flow Statement tracks the flow of cash through the company over a period of time
It connects all three statements together. It begins with Net Income and concludes with ending
Cash Balance.
I.E.,
Financial statements are not used in isolation of each other; they have multiple connections
Understanding these connections allows us to analyze the financial activities and health of a company.
Observe the flow of cash; when does it enter the company ? Leave it ? What is the effect on cash of a transaction ?
Observe the flow of goods and services; When and where are the entries associated with them ?
Financial Statements: Connections (cont’d)
• Balance Sheet Connections
• Change in cash on Cash Statement is added to Balance Sheet cash
• Always : Total Assets = Total Liabilities + Shareholder’s Equity (SE)
• When you subtract from asset line item you must either add to another asset or subtract from
liability line item to maintain balance
• Net Income (after distributions) on Income Statement is added to retained earnings on Balance
Sheet, thus SE increases as well
• Income Statement Connections
• When a sale is made on credit, revenue increases on Income Statement and accounts receivable
on Balance Sheet increases by same amount
• When a sale is made from inventory, value is moved from inventory on Balance Sheet to COGS on
Income Statement
• When customer pays for product bought on credit, the accounts receivable on Balance Sheet
decreases, cash increases as it becomes a cash receipt on the Cash Statement
• When sale is entered on Income Statement, revenue and net income increase on Income
Statement, and retained earnings increases on Balance Sheet
• When accrued expense (SG&A) is increased, Net Income down, Cash up,
Retained Earnings down. In general, Expenses reduce Net income on Income Statement and
reduce Retained earnings on the Balance sheet.
Financial Statements: Connections (cont’d)
• When an accounts payable is paid, it becomes a cash outflow on Cash Statement and
reduces cash on Balance Sheet
• Debt Schedule
• Tracks all major debt, issuances and retirements, interest expense / income
• Loans are entered under Short-term borrowings and Long-term borrowings on Cash
Statement increasing cash and increasing cash on the Balance Sheet
• Net Borrowings increase Liabilities on Balance Sheet
• Repaying loans, reduces Net Borrowings, and is a cash outflow that reduces cash on Cash
Statement and on Balance Sheet
• Interest expense and interest income recorded in Income Statement
• Depreciation Schedule
• CAPEX on the Depreciation Schedule are recorded on the Cash Statement, CFI
• Depreciation expenses are line items on the Income Statement
• PP&E on Balance Sheet reflects CAPEX investment less depreciation expense
Financial Statements: Connections (cont’d)
BS = balance sheet DEPREC = depreciation schedule
IS = income statement OWC = operating working capital statement
CF =cash flow statement DEBT = debt schedule

• BS: cash(t) = cash (t-1) + CF ( ∆cash(t) )


• BS: Retained Earnings(t) = Retained Earnings(t-1) +
Net income From Continuing Ops (t) – Dividends paid (t) - Distributions (t)
i.e., Retained Earnings = sum of all profits – sum of all distribution
• IS : when a sale is made on credit, Revenue (+) and Accts Rec (+) ,
OWC (+) BS (+) But CF (∆Accts Rec) (-)
• IS: when a sale is made COGS (+) =>
OWC (inventory) (+) CF (∆ inventory) (-) BS (inventory) (+)
• When a customer pays cash for item, purchased on credit, then:
OWC (Accts Rec) (-) CF (∆Accts Rec) (+) BS (Accts Rec) (-)
Financial Statement Connections: (cont’d)
• IS: SG&A expense (+) =>
OWC (Accrued Benefits) (+) CF (∆Accrued Benefits) (+) BS (Accrued Benefits) (+)
Of course, IS (Net Income) (-) BS (Retained Earnings) (-)
• DEBT : interest income & expense flows to IS; Net Borrowings flows to
CF (CFF) and to BS (Liabilities)
• DEPREC: Book Deprec flows to IS
• BS: PP&E(t) = PP&E(t-1) + CAPEX(t) – Book Deprec (t)
• BS: Deferred Tax Liab (t) = Deferred Tax Liab (t-1) + DEPREC Tax Savings(t)
• IS: includes accruals which are not cash flows; only lists cash flows associated
with the sale of goods during the given period
Financial Statement Connections: Excel “What if Scenarios”
Inputs:
LIKELY
PRICE_GROWTH 5.0%

COGS/REV GROWTH 2.0%


DIV PER SHARE GROWTH 10.0%

BEST
PRICE_GROWTH 10.0%

COGS/REV GROWTH 0.0%


DIV PER SHARE GROWTH 0.0%

WORST
PRICE_GROWTH 0.0%
COGS/REV GROWTH 10.0%
DIV PER SHARE GROWTH 10.0%

CURRENT

PRICE_GROWTH 0.0%
COGS/REV GROWTH 0.0%

DIV PER SHARE GROWTH 0.0%


Financial Statement Connections: Excel “What if Scenarios”
• Output:

Scenario Summary
BEST WORST LIKELY CURRENT
Changing Cells:
PRICE_GROWTH 10.0% 0.0% 5.0% 0.0%
COGS/REV GROWTH 0.0% 10.0% 2.0% 0.0%
DIV PER SHARE GROWTH 0.0% 10.0% 10.0% 0.0%
Result Cells:
ROE= 2012 27.9% 24.8% 26.7% 25.9%
ROE= 2013 25.6% 20.6% 23.6% 22.4%
ROE= 2014 23.9% 17.5% 21.4% 19.8%
NET PROFIT MARGIN= 2012 31.7% 29.7% 31.2% 31.4%
NET PROFIT MARGIN= 2013 32.4% 28.3% 31.4% 31.8%
NET PROFIT MARGIN= 2014 32.8% 26.4% 31.3% 32.0%
EBITDA= 2012 $ 7,835 $ 6,790 $ 7,409 $ 7,123
EBITDA= 2013 $ 9,480 $ 7,066 $ 8,475 $ 7,835
EBITDA= 2014 $ 11,471 $ 7,286 $ 9,691 $ 8,618
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.