Chapter 2Financial Statements Refresher

Before getting into M&A analysis, it is important to give a brief overview of the six major statements in a standard financial operating model and how they work together:

  1. Income statement
  2. Cash flow statement
  3. Balance sheet
  4. Depreciation schedule
  5. Working capital schedule
  6. Debt schedule

The general concepts in this chapter are necessary to understand the merger processes in the subsequent chapters.

The Income Statement

The income statement measures a company's profit (or loss) over a specific period of time. A business is generally required to report and record the sales it generates for tax purposes. And, of course, taxes on sales made can be reduced by the expenses incurred while generating those sales. Although there are specific rules that govern when and how those expense reductions can be utilized, there is still a general concept:


A company is taxed on profit. So:


However, income statements have grown to be quite complex. The multifaceted categories of expenses can vary from company to company. As analysts, we need to identify major categories within the income statement in order to facilitate proper analysis. For this reason, one should always categorize income statement line items into nine major categories:

  1. Revenue (sales)
  2. Cost ...

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