The document covers key financial concepts related to income statements and cash flow statements, including revenues, expenses, operating profit, and various margins like gross profit and net profit margins. It explains components such as operating expenses, interest, taxes, and measures like EBITDA, EBIT, and free cash flow, emphasizing their importance in evaluating a company's financial health. Additionally, it describes stock valuation metrics like market capitalization, enterprise value, and various ratios that assess a company's performance.

1. Accounting: Income Statement
and Statement of cash flows
By Cameron Fen

2. Income Statement
• Income Statement includes Revenues,
Expenses and Profit
• We also like to talk about margins which is
usually a percentage of revenue
– Ex net profit margins = net profit/revenue
• As an investor we don’t just look at this years
earnings, look at the long term earnings trend
as well as average earnings

5. Revenue and Cost of Goods Sold
• Revenue is the total amount of sales the
company has made
• What is Cost of Goods Sold mean?
• What does Gross Profit Margin mean?

6. Revenue and Cost of Goods Sold
• Revenue is the total amount of sales the
company has made
• Cost of Goods Sold is the total direct cost of
sales
– Ex how much it costs to buy the materials and
manufacture a phone
• Gross Profit is Revenue – COGS
• Gross Margin is Gross Profit/Revenue

7. Operating Expenses
• Operating Expenses are expenses necessary
for the operations of the business
• What are different types of operating
expenses?

8. Operating Expenses
• Operating Expenses are expenses necessary
for the operations of the business
• Different types of expenses include SG&A,
R&D, D&A and other

9. SG&A and R&D
• Selling General and Administrative includes
marketing expenses as well as administration
expenses (obviously!)
• Research and Development is something
companies can cut to boost earnings in the
short term but doesn’t bode well in the long
term.
– R&D often times gives a company it’s moat and
benefits from economies of scale

10. Operating profit and interest expenses
• What is operating profit comprised of?
• How do you get from operating profit to profit
before taxes?

12. Operating profit and interest expenses
• Operating profit is gross profit minus
operating expenses
• Next you take away interest expenses and add
in interest income to get Profit before taxes
– Here S&P adds affiliate income and other income
too (take accounting if you are interested in
learning more)

13. Taxes and profit
• After you take out taxes you get net profit
• Sometimes you will have to takeout minority
owners interest as well as preferred interest
before you get earning attributable to
common shareholders
• Net profit margin = net profit/revenue

15. Some other terms
• EBIT = Earnings Before Interest and Taxes
– When trying to calculate enterprise value ratios (more
on that later) you will use EBIT in place of earnings
• EBITDA = Earnings Before Interest Taxes
Depreciation and Amortization
– D&A is a real cost the business has to pay but often
times a bond holders will use this to measure how
safe it is
– Sometimes equity holders will use this metric too to
evaluate the company if say the company is not
making any money yet

16. EBIT

17. EBITDA

18. What is the Statement of Cash
Flow?

19. Cash Flow
• The statement of cash flow measures the
change in cash from one period to the next
• Statement of Cash Flow split into 3 parts
– Cash from Operations, Cash from Investments and
Cash from Financing
• Since the balance sheet has to balance, the
change in cash is equal to the opposite change
in everything else on the balance sheet

21. What do you think is included in
Cash from Operations?

22. Cash for Operations
• Cash from Operations include net income plus
all non cash expenses on the income
statement (Ex Depreciation and Amortization)
as well as includes all the changes in current
assets and current liabilities

24. What will be included in Cash
from Investing?

25. Cash from Investments
• Cash from Investments primarily includes
Capital expenditures, acquisitions, and
purchases of investments

27. What about Cash from
Financing?

28. Cash from Financing
• Includes paying and repaying debt, dividends
and buyback payments

31. Free Cash Flow (FCF)
• This is another measure of earning power
• Free Cash Flow is Cash from Operations minus
Capital Expenditures
– This is the amount of money available to common
shareholders
– Usually a more accurate measure of the earning
power of a company than net earnings if averaged
over the long term
– If the company is growing a lot need to adjust
capital expenditures for growth capex

32. Stock Jargon
Does anyone know any ratios or
words we use when looking at
valuation?

33. Stock Statistics
• Market Capitalization: The total value of the
company usually the total value of all the
stock
• Enterprise Value (EV): Total Debt + Market
Capitalization – Cash
– This is how much debt and equity holders value
the operating business

34. Stock Ratios
• P/E ratio: The total market capitalization
divided by the net income
– The inverse of the P/E gives you the earning yield
and can help approximate the rate of return you
should expect from the stock if there is no growth
and mediocre but not poor capital allocation and
no capital appreciation
– Can think of the earnings yield as the interest rate
on the equity

35. EV ratios
• EV/EBIT: gives the ratio of earnings that goes
to the Enterprise owners (keep in mind
interest is the “earnings” that go to debt
holders)
• EV/EBITDA: It is used for debt and equity
analysis but shouldn’t be
– It is just another ratio to value how cheap a
company

36. Return on equity/investments
• Return on Equity = net profit/total equity in
the company
– Measures how effectively the equity generates
income
• Return on Investment = net profit/(equity +
debt)
– Measures how effectively a dollar in enterprise
value generates income