CHAPTER 2Financial Statements Overview

It is important to know six major statements in financial modeling:

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

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:

equation

A company is taxed on profit. So:

equation

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 of goods sold (COGS)
  3. Operating expenses
  4. Other income
  5. Depreciation and amortization
  6. Interest
  7. Taxes
  8. Nonrecurring and extraordinary items
  9. Distributions

No matter how convoluted an income statement is, a good analyst would ...

Get The Technical Interview Guide to Investment Banking, + Website now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.