Wall Street shoool financial modelling c

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The WallStreetSchool
FinancialStatements
Certification in Investment Banking
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The Wall Street School
The WallStreetSchool

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Financial Statements -Snapshot
Income Statement Balance Sheet Cash Flow Statement
States how the company
has performed over a period
of time
Reports whether the
company is in profit or loss
(Gross profits, Operating
profits and Net profits)
Gives a snapshot of the
company’s financial position
at a given point of time –
showing what a company
owns, what it owes, and
what is left for the owners
Total Assets must be equal to
sum of total of liabilities and
equity
Paints the picture of a
company’s financial status.
Reports on company’s cash
movements during the
period(s), separating them
into operating, investing and
financing activities.
Financial Statements

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Recording Business Expenses
Business Expenses
Capital ExpensesRevenue Expenses
Expenses to buy long term assets for
company i.e. to buy assets which can be
used for number of years
Example Machinery, Vehicles etc.
Will flow to Balance Sheet as Fixed Assets
Expenses necessary to run day to day operations of the business
i.e. the expenses which will give immediate economic benefit to
the company.
Example production expenses, salaries, electricity etc.
Will Flow to Income Statement
Direct Expenses In-Direct Expenses
Expenses related to production
of goods or rendering the
services.
Examples include raw material
costs, labor expenses
Expenses related to running the
business (other than direct costs)
Examples include salaries,
electricity expenses, marketing
etc.

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Statement of Financial Position
Assets
Liabilities
Equity
Income Statement
Revenues
Expenses
Income
Costs
Costs NOT
Capitalized
Creates an immediate
benefit, such as fuel
used in delivery
vehicles
Creates a future
economic benefit,
example Machinery
Costs Capitalized
Source: “Investment Banking: The Dream Begins”
Recording Business Expenses

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Income Statement
Income Statement presents a snapshot of the
performance of an enterprise over a given
period (a year, half-year, quarter, etc.)
Reports the revenues earned during a period,
the expenses incurred to produce those
revenues, and the resulting net income or loss.
Measures performance in terms of Gross
Profits (Raw Profits), Operating Profits and
Net Profits
In$M 31 MMM’YY
Revenues xxx
Less:Cost of Goods Sold (xxx)
Gross Profit xxxx
Less: Selling,General & Administrative Expenses (xxx)
EBITDA xxxx
Less: Depreciation Expenses (xx)
Operating Profit(EBIT) xxxx
Less: InterestExpense (xx)
Less / Add: Non Operating Items (xx)
Profit Before Tax xxxx
Less: Income Tax (xxx)
Net Income xxx
Non Controlling Interest (x)
Net Income for Equity Shareholders xxx

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Income Statement Components
Revenues:Thefirstlineitemonanyincomestatementisrevenues.Itpertainstothesalesabusinessgeneratesfromsellinggoodsorrendering
servicesduringthespecifiedperiodforwhichtheincomestatementisprepared.
CostofGoodsSold(CoGS):Ittakesmoneytomakemoney.CoGSrefertothetotaldirectexpensesincurredbyacompanytoproducea
product.Directexpensesincluderawmaterialcosts,laborchargesandotherdirectexpenseslikecarriageinwards.
=OpeningStock+Purchases+LaborExpenses–ClosingStock
GrossProfit:Insimplewords,theexcessofsalesovercostofsalesisgrossprofitforacompany.Itrepresentsthecrudeprofitsofcompanyafter
meetingnecessaryproductionexpenses.
SG&A(operatingexpense):Selling,generalandadminexpensesarethecostsincurredbythecompanyduringthecourseof
operating/runningthebusiness.TypicalexamplesofSG&Aaremarketing,salaries,travel,rentetc.
EBITDA:EBITDAstandsforearningsbeforeinterest,taxes,depreciationandamortization.EBITDAisusedtoanalyzeacompany’soperating
profitabilitybeforedeprecationandamortizationcharges.

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Income Statement Components
DepreciationandAmortization(D&A):Depreciationischargedonfixedassetslikebuilding,vehicles,machineryetc.fortheuseofassets
duringtheyear.Thepurposeofrecordingdepreciationasanexpenseoveraperiodistospreadtheinitialpurchasepriceofthefixedassetoverits
usefullife.Eachtimeacompanypreparesitsfinancialstatements,itrecordsadepreciationexpensetoallocatethelossinvalueofthemachines,
equipmentorcarsithaspurchased.Whendepreciationischargedonintangibleassetsliketelecomlicense,patentsetc.itisknownasamortization.
Depreciation=AssetsxDepreciationRate(%)
EBIT(OperatingProfit):Operatingprofitmeanstheprofitsearnedfromcorebusinessoperationsbeforedeductionofinterestandincometax.
InterestExpenses:Companiesoftenborrowmoneyinordertobuildassets/acquirecompaniesorfundday-to-dayoperations.Interestonthat
borrowedmoneyisanexpenseandmustberecordedinincomestatement.Acompanyhastopayinterestwhetherornotitisgeneratingprofits.
NetIncome/PAT:ProfitAfterTaxOrNetIncomereferstotheamountsthatacompanyhasactuallyearnedorlostduringtheaccounting
periodafterincurringexpenses,andpaymentstodebtholdersandtofortaxobligations.

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Balance Sheet
BS is divided into two sections
-Liabilities & Equity
-Assets
Assets
(Owned and Used by Business)
Liabilities & Equity
(Amounts Owed and Funding Sources)
The Liabilities & Equity section represent the various
sources of funds for an enterprise
These are the liability of the enterprise to the providers of
these funds
The Assets section represents the various uses of funds by
an enterprise
These are the assets held by the enterprise, that are
needed to operate the business (e.g. Office space,
factory, raw material, etc.)
=
BSisalwayspresentedasonagivenday,sayasatMarch31,2014.Itpresentsastaticpictureoftheassetsand
liabilitiesoftheenterpriseasonthatdate.

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Balance Sheet
Liabilities and Equity $M
Current Liabilities
Short Term Debt xxx
Creditors xxx
Others xxx
Total Current Liabilities xxxx
x
Long Term Debt xxxx
Other Non current liabilities xxxx
Total Liabilities xxxx
Shareholders Equity xxxx
Non Controlling Interest xxx
Total Equity & Liabilities xxxx
Assets $M
Current Assets
Cash & Cash equivalents xxx
Short term investments xxx
Debtors xxx
Inventories xxx
Others xxx
Total Current Assets xxxxx
Property, Plant & Equipment xxxx
Investments xxxx
Other Non current assets xxx
Total Assets xxxx

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Balance Sheet Components -Assets
CurrentAssets:Currentassetsincludethoseassetsexpectedtobeconvertedintocashwithintheupcoming
fiscalyearorthecompany’soperatingcycle(thecash-to-cashcycle),whicheverislonger.
Cash&Bank:Includescashinhandandcastatbank.Representstheamountofhardcashthatthecompanyhasattheendofyear.
AccountsReceivables/Debtors:Accountsreceivablesorthesundrydebtorsaretheamountsduetobecollectedfromcustomersforthe
goodssoldtothem.
Inventories:Inventoryconsistsofmerchandiseabusinessownsbuthasnotsold.Closinginventoriesarecalculatedwithadditionofgoods
manufacturedduringtheyearinopeningstockandsubtractinggoodssoldintheyear.Notallcompanieshaveinventories,particularlyif
theyareinvolvedinadvertising,consulting,services,orinformationindustries.Forcompaniesthatdosellphysicalgoods,however,inventories
areextremelyimportant.
FixedAssets(PropertyPlantandEquipment):PPEorthefixedassetsconsistoflong-livedassetsandincludeland,building,machinery,
equipment,furnitureandvehiclesusedinoperatingactivities.Thevalueinthe
balancesheetisafterdeductingthedepreciationcharges.

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Balance Sheet Components –Liabilities and Equity
CurrentLiabilities:Obligationsthatmustbesettledwithinoneyeararecalledcurrentliabilities
AccountsPayable/Creditors:‘AccountsPayable’orthe‘Creditors’aretheduespayabletothosefromwhomthecompanyhasboughtgoods
andservices.Onecompany'saccountspayableisanothercompany'saccountsreceivable/debtors,whichiswhybothtermsaresimilarly
structured.
AccruedLiabilities:Obligationsforexpensesthathavebeenincurredbutnotyetpaid;examplesareaccruedsalariespayable(salaries
earnedbyemployeesbutnotyetpaid),accruedinterestpayable(interestthatisowingbuthasnotbeenpaid),andaccruedincometaxes
(taxesdue).
ShortTermBorrowings:Short-termdebtpayabletobanksorotherlenders.Alsoincludesprincipalportionoflong-termdebtthatisdueto
bepaidwithinoneyear.
Long-termDebt:Amountsborrowedthatarescheduledtoberepaidmorethanoneyearinthefuture;anyportionoflong-termdebtthatisdue
withinoneyearisreclassifiedasacurrentliabilitycalledcurrentmaturitiesoflongtermdebt.Long-termdebtincludesbonds,mortgages,andother
long-termloans.
Equity:Stockholders’equityreflectsfinancingprovidedfromcompanyowners.Shareholders'equitycomesfromtwomainsources:contributed
capitalandearnedcapital.
Contributedcapitalisthenetfundingthatacompanyreceivedfromissuingandreacquiringitsequityshares;thatis,thefundsreceived
fromissuingshareslessanyfundspaidtorepurchasesuchshares.
Earnedcapitalisthecumulativenetincome(loss)thathasbeenretainedbythecompany(notpaidouttoshareholdersasdividends.Also
knownasRetainedEarnings.

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Statement of Cash Flows
$M
Cash From Operating Activities
Net Income xxx
Add:D&A xxx
Add:Interest Expenses xxx
Add:Provisions Created xxx
Add:Working Capital Change xxx
xxx
Cash From Investing Activities
Capital Expenditure, Net xxx
Investments in JVs / Subsidiaries,Net xxx
Investments Purchased, Net xxx
xxx
Cash From Financing Activities
Equity Raisedor Repaid xxx
Dividends Paid xxx
Debt Raisedor Repaid xxx
Interest Paid xxx
xxx
Cash& Equivalents at start of period xxx
Changein Cash & Equivalent during the year xxx
Cash& Equivalents at end of period xxx

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Statement of Cash Flows
CashflowsstatementlinkstheIncomeStatement(preparedon‘accrual’principle)andthebalancesheet
NetProfitinIncomestatementdoesnotnecessarilymeanthecashprofitofthecompany,asitrecordeventhoseincomesandexpensesfor
whichcashhasnotbeenreceivedorpaid.Forexamplecreditpurchasesorcreditsales.Cashflowstatementprovidesthereferencecheckfor
thequalityof‘profits’generatedbyacompany
Forinstance,ifthecompanyreportsprofits,mostofwhichremainuncollectedintheformof‘debtors’,cashflowfromoperationswill
benegative,whichshouldpromptananalysttoprobedebtorsfurther
Cashflowsfromoperatingactivities:Cashflowsfromthecompany’stransactionsandeventsthatrelatetoitsoperations.Therefore,cash
fromoperatingactivitiesgenerallyresultfromthetransactionsandothereventsthatenterintothedeterminationofnetprofitorloss.Itcountscash
cominginfromcustomersaswellascashusedtopaysuppliersformaterials,tothegovernmentfortaxes,andtopayworkers’salaries.
Cashflowsfrominvestingactivities:Companieskeepcarefultrackofmoneythey’vespentupgradingthemselvesorinvestinginthemselves
oroutside.Thissection,forinstance,countsthecashconsumedbuyingnewassetssuchasequipmentorfacilities.
Cashflowsfromfinancingactivities:Companiesmayeitherbeself-sufficienttosupporttheiroperationswiththecashtheygeneratefrom
theirbusinessortheyneedcashinjections.Thissectionaccounts,forinstance,cashplowedintoacompanybylendersandinvestors,andcashusedto
paycashdividendstoinvestorsortopaydowndebts.

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Constructing a Statement of Financial Position
Income Statement Cash Flow Statement
Statement of Financial
Position
Cash income & Expenses
Non -Cash income &
Expenses
Net Income
CF from Operations
CF from Investing
CF from Financing
Cash at Year End
Current Assets
Non-Current Assets
Current Liabilities
Non-Current Liabilities
Shareholders’ Fund

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Financial Health Checkup
Profitability
Profit Margins
(GP Margin, Operating Margin,
Net Margin)
All the above ratios are
calculated on sales
Helps gauge the Margins that the
Company is generating
Solvency
Liquidity Ratios
(CurrentRatio, Quick Ratio)
Coverage Ratios
(Interest Coverage, Debt Service
Coverage)
Capital Structure
(Debt to Equity)
Helps understand the liquidity
position and capital structuring
Are there sufficient liquid assets to
meet its short term obligations
How well is the company placed
to meet its interest obligations
Efficiency
Turnover Ratios
(Inventory Turnover,Debtors
Turnover)
Return Ratios
(RoE and RoCE)
Helps to Understand how
effectively the management is
using its assets to generate returns
How efficiently are the assets
being utilized?
How efficiently is the company
managing its working capital
Source: “Investment Banking: The Dream Begins”

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DuPont RoE
Delightfully simple to calculate, RoEis a critical weapon in the investor’s arsenal, as long as it’s properly understood
for what it is.
Breaking RoEinto these component parts not only allows the investor to determine what kind of RoEis being
generated by a company, but also to examine the quality of that return as well as which financial levers management
is pulling to create it.
RoE = NetMargin x Assets Turnover xEquityMultiplier
Sales
Net Profit
Assets
Sales
Equity
Assets

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Leverage Impact on RoE
Base Case
(Debt to Equity 1:1)
Change Scenario
(Debt to Equity 3:1)
Debt A 2,000 3,000
Equity B 2,000 1,000
EBIT C 800 800
Interest@10% D 200 300
PretaxProfit E = C–D 600 500
Income Tax@
30%
F 180 240
NetIncome G = E –F 420 260
RoE G ÷B 21% 26%

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Different Company Files
File Nature Description
10K Annual Report A10KistheofficialversionofaUSbasedpubliccompany’sannualreport,filedwiththe
SecuritiesandExchangeCommission.The10-Knormallycontainsinformationwithrespectto
businessdescription,auditedfinancialstatements,management discussionandanalysis
(MD&A),outstandingdebt,basicsharesoutstanding,andstockoptionsetc.Itoftenincludes
informationnotfoundelsewhere.Oilcompaniesoftenreportchangesintheirproven
reserves.Manufacturingcompanieswilllistalloftheirownedlocations.
10KT Annual Report 10Kbecomes10KTwhenacompanychangesitsfiscalyear(T=Transitional)
10Q Quarterly Report A10QisheofficialversionofaUSbasedpubliccompany’squarterlyreport,filedwiththe
SecuritiesandExchangeCommission.Thisdocumentcontainsearnings,revenues,andother
financialdataforthemostrecentquarterandtheyeartodate(YTD)period.It’sgenerally
leanerthanthe10K,thecompany’sannualfiling.Butthe10Qwillgiveyouanupdated
snapshotofthecompany’sperformance.
8K Press Release Interimreport,whichannouncesanymaterialeventsorcorporatechangesthatoccur
between10-Qquarterlyreports.Suchmaterialevents/corporatechangesmayinclude
earningsannouncements,entryintodefinitivesale/purchaseagreementsfor(acquisitions,
disposalsetc.),capitalmarketstransactions,raisingequityordebtetc.
IncaseofM&A,apublictargetisrequiredtofilean8Kwithinfourbusinessdaysofthe
transactionannouncement
PREM14A /
DEFM14A
Proxy Statement Theproxystatementcontainsasummaryofthebackgroundandtermsofthetransaction,a
descriptionofthefinancialanalysis,acopyofthepurchase/saleagreement,andproforma
financialdata,ifapplicable.TheproxystatementisfiledwithSECunderthecodesPREM14A
(Preliminary)andDEFM14A(Definitive)
DEFM14C Definitiveinformationstatementrelatingtomergeroracquisition

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ThankYou
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ARC School of Finance
The WallStreetSchool
Suite 402, Pearls Business Park
NetajiSubhashPlace
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(Adjacent Fun Cinemas)
Himanshu Jain
(Cell): [phone]
(Email): [email protected]
(Web): www.thewallstreetschool.com
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