Financial Modeling Finals Review Questions and Correct Answers
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Course
Financial Modelling
Institution
Financial Modelling
What is working capital? It's the measure of a company's current assets minus its current liabilities
What does working capital mean? High and low? It's a measure of the short term efficiency of a company, measuring its ability to cover potential short term issues
What is operating working capita...
Financial Modeling Finals Review
Questions and Correct Answers
What is working capital? ✅It's the measure of a company's current assets minus its
current liabilities
What does working capital mean? High and low? ✅It's a measure of the short term
efficiency of a company, measuring its ability to cover potential short term issues
What is operating working capital? ✅It is the current assets less current liabilities, but
without cash and cash equivalents or debt
How does working capital differ from operating working capital? ✅In operating working
capital there is no cash equivalents or debt
Why is operating working capital more useful than working capital when modeling and
analyzing? ✅OWC focuses on the working capital line items that are most directly
related to the company's operations
What's the formula for A/R Days? ✅Accounts Receivable / Revenue * 360 is the basic
answer, with the extended being the average of AR over two years divided by the most
current year
What's the formula for Accrued Expenses days? ✅Accrued Expenses / Operating
Expenses *360
What's the formula to project A/R when using days metric? ✅Accounts Receivable
Days / 360 * Revenue
How do you project accrued expenses when using the days metric? ✅Accrued
Expenses Days / 360 * Operating Expenses
How does an A/R increase of $15 flow through the income statement, balance sheet,
and cash flow statement? Taxes? ✅Income statement:
Revenue increases by $15
Tax effect is -$6
Net income increases by $9
Cash Flow Statement:
Net Income increases by $9
AR decreases by 15
Total Cash decreases by $6
Balance Sheet:
Total Cash decreases by $6
, AR increases by $15
Retained Earnings increases by $9
How does an A/R decrease flow through the income statement, balance sheet, and
cash flow statement? ✅Income Statement:
No change
Cash Flow Statement:
AR increases by $15
Total cash increases by $15
Balance Sheet:
Total cash increases by $15
AR decreases by $15
How is the balance sheet structured? ✅Assets = Liabilities + Shareholders Equity
What is the purpose of a balance sheet? ✅To measure a company's financial position
at a specific point in time
What are the two common modeling methods in relation to the cash flow statement and
balance sheet? ✅1. Balance sheet drives the cash flow statement 2. Cash flow
statement drives the balance sheet
How does the model work when 'balance sheet drives the cash flow'? ✅CF is derived
from subtracting YOY balance sheet changes
How does the model work when 'cash flow drives the balance sheet? ✅Balance sheet
is projected based on how cash is being sourced or spent
What is the recommended model out of the two common methods in relation to the cash
flow statement and the balance sheet? ✅CF drives the balance sheet because it's
more logical and has been proven to be less prone to error. Also back-solving into a CF
can lead to an incomplete picture of each individual CF
What is the purpose of the debt schedule? ✅To track every major type of debt a
company has and the associated interest and payment schedules for each. Also helps
track the cash available, which could be used to pay down those debts and any interest
income that could be generated from cash or cash equivalents available.
What is a mandatory and non-mandatory issuance and retirement? What is the
difference? ✅A mandatory I & R are those that have been planned or scheduled, while
a non mandatory is a payment or issuance made that is beyond the contractual
requirements of the debt
What is cash available to pay down debt? ✅CF before debt paydown is a measure of
all cash generated or paid in a given period, excluding cash issued or paid from debts
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