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Wall Street Prep Redbook
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Wall Street Prep RedbookWhat is the primary purpose of US GAAP? - VERIFIED ANSWER In the US, the Securities and
Exchange Commission ("SEC") authorizes the Financial Accounting Standards Board ("FASB") to
determine the set of accounting rules followed by publicly traded companies.
Under FASB, financial statements are required to be prepared in accordance with US Generally
Accepted Accounting Principles ("US GAAP").
Through the standardization of financial reporting and ensuring all financials are presented on a fair,
consistent basis - the interests of investors and lenders are protected.
What are the main sections of a 10-K? - VERIFIED ANSWER In a 10-K, you'll find the three core
financial statements, which are the income statement, cash flow statement, and balance sheet.
There'll also be a statement of shareholders' equity, a statement of comprehensive income, and
supplementary data and disclosures to accompany the financials.
Business Overview: Overview of the company's business divisions, strategy, product or service
offerings, seasonality, geographical footprint, and key risks.
Management's Discussion & Analysis ("MD&A"): Commentary and summarized analysis of the
company's fiscal year result from the perspective of the management team.
Financial Statements: The "Core 3": Income Statement, Balance Sheet, Cash Flow Statement The
"Other 2": Statement of Comprehensive Income, Statement of Shareholders' Equity
What is the difference between the 10-K and 10-Q? - VERIFIED ANSWER 10-K: A 10-K is the annual
report required to be filed with the SEC for any public company in the U.S. The report is
comprehensive and includes a full overview of the business operations, commentary on recent
performance by management, risk factors, disclosures on changes in accounting policies - and most
importantly, the three core financial statements with supplementary data.
10-Q: A 10-Q refers to the quarterly report required to be filed with the SEC. Compared to the 10-K,
this report is far more condensed in length and depth, with the focus being on the quarterly
financials with brief sections for MD&A and supplementary disclosures.
,Additional Differences: A few more differences are 10-Ks are required to be audited by an
independent accounting firm, but 10-Qs are only reviewed by CPAs and left unaudited. 10-Ks must
also be filed ~60-90 days after the fiscal year ends, whereas 10-Qs must be submitted ~40-45 days
after the quarter ends.
Walk me through the three financial statements. - VERIFIED ANSWER Income Statement ("IS"): The
income statement shows a company's profitability over a specified period, typically quarterly and
annually. The beginning line item is revenue and upon deducting various costs and expenses, the
ending line item is net income.
Balance Sheet ("BS"): The balance sheet is a snapshot of a company's resources (assets) and sources
of funding (liabilities and shareholders' equity) at a specific point in time, such as the end of a
quarter or fiscal year.
Cash Flow Statement ("CFS"): Under the indirect approach, the starting line item is net income,
which will be adjusted for non-cash items such as D&A and changes in working capital to arrive at
cash from operations. Cash from investing and financing activities are then added to cash from
operations to arrive at the net change in cash, which represents the actual cash inflows/(outflows) in
a given period.
Walk me through the income statement. - VERIFIED ANSWER The income statement shows a
company's accrual-based profitability over a specified time period and facilitates the analysis of its
historical growth and operational performance. The table below lists the major income and expense
components of the income statement:
Net Revenue (or Sales): The income statement begins with revenue (often called the "top line"),
which represents the total value of all sales of goods and delivery of services throughout a specified
period.
Less: Cost of Goods Sold: COGS represents the costs directly tied to producing revenue, such as the
costs of materials and direct labor.
Gross Profit: Revenues - Cost of Goods Sold = Gross Profit
Less: Research & Development ("R&D"): R&D refers to developing new products or procedures to
improve their existing product/service offering mix.
,EBITDA: Gross Profit - SG&A - R&D = EBITDA. EBITDA stands for: Earnings Before Interest, Taxes,
Depreciation & Amortization.
Less: Depreciation & Amortization ("D&A"): D&A is a non-cash expense that estimates the annual
reduction in the value of fixed and intangible assets
Operating Income ("EBIT"): EBITDA - D&A = Operating Income (or EBIT) EBIT stands for: Earnings
Before Interest and Taxes.
Less: Interest Expense, net: Interest expense from debt, net of interest income generated from
investments.
Pre-Tax Income ("EBT"): EBIT - Interest Expense, net = Pre-Tax Income (or "Earnings Before Tax")
Less: Tax Expense: Tax liability recorded by a company for book purposes.
Net Income: EBT - Tax Expense = Net Income (referred to as the "bottom line")
Walk me through the balance sheet. - VERIFIED ANSWER The balance sheet shows a company's
assets, liabilities, and equity sections at a specific point in time. The fundamental accounting
equation is: Assets = Liabilities + Shareholders' Equity. The assets belonging to a company must have
been funded somehow, so assets will always be equal to the sum of liabilities and equity.
Assets Section: Assets are organized in the order of liquidity, with "Current Assets" being assets that
can be converted into cash within a year, such as cash itself, along with marketable securities,
accounts receivable, prepaid expenses, and inventories. "Long-Term Assets" include property, plant,
and equipment (PP&E), intangible assets, goodwill, and long-term investments.
Liabilities Section: Liabilities are listed in the order of how close they're to coming due. "Current
Liabilities" include accounts payable, accrued expenses, and short-term debt, while "Long-Term
Liabilities" include items such as long-term debt, deferred revenue, and deferred income taxes.
Shareholders' Equity Section: The equity section consists of common stock, additional paid-in capital
(APIC), treasury stock, and retained earnings.
, Could you give further context on what assets, liabilities, and equity each represent? - VERIFIED
ANSWER Assets: Assets are resources with economic value that can be sold for money or bring
positive monetary benefits in the future. For example, cash and marketable securities are a store of
monetary value that can be invested to earn interest/returns, accounts receivable are payments due
from customers, and PP&E is used to generate cash flows in the future - all representing inflows of
cash.
Liabilities: Liabilities are unsettled obligations to another party in the future and represent the
external sources of capital from third parties, which help fund the company's assets (e.g., debt
capital, payments owed to suppliers/vendors). Unlike assets, liabilities represent future outflows of
cash.
Equity: Equity is the capital invested in the business and represents the internal sources of capital
that helped fund its assets. The providers of capital could range from being self-funded to outside
institutional investors. In addition, the accumulated net profits over time will be shown here as
"Retained Earnings."
What are the typical line items you might find on the balance sheet? - VERIFIED ANSWER Assets
Section
Current Assets (Listed in Order of Liquidity)
Cash & Cash Equivalents: This line item includes cash itself and highly liquid, cash-like investments,
such as commercial paper and short-term government bonds.
Marketable Securities: Marketable securities are short-term debt or equity securities held by the
company that can be liquidated to cash relatively quickly.
Accounts Receivable: A/R refers to payments owed to a business by its customers for products and
services already delivered to them (i.e., an "IOU" from the customer).
Inventories: Prepaid expenses are payments made in advance for goods or services expected to be
provided on a later date, such as utilities, insurance, and rent.
Non-Current Assets
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