The key steps in developing a financial statement model

1. Mr.Sameh Aljabli

2.  Step 1: Understand the expected uses of the
model and the required outputs.
 Step 2: Collect historical data for the
company, its industry, and its major
competitors.
 Step 3: Understand the company’s plan and
develop a comprehensive set of modeling
assumptions.
 Step 4: Build the model and debug it.
 Step 5: Improve the model based on
feedback.

3.  Forecasting Line Items
 The “Plug”
 Depreciation
 Retained Earnings
 Interest Expense
 Sign Convention and Formatting of Financial Statements
 THE LEVEL OF DETAILS IN A MODEL
 THE STATEMENT OF CASH FLOWS
 Modeling the Statement of Cash Flows
 FREE CASH FLOW
 Uses of the Free Cash Flow
 Free Cash Flow and Business Valuation

4. Summation
Numbers (+)
Subtraction
Numbers:
Revenue is (-)
Expense is (+)
Summation
Numbers:
Debits * (-)
Credit (=)
Numbers:
(-) outflow
(+) inflow

5.  Assets = Liabilities + Shareholders’ Equity

 ΔAssets = ΔLiabilities + ΔShareholders’ Equity

 ΔCash = ΔLiabilities + ΔShareholders’ Equity −
ΔNon-Cash Assets

12.  These statements give you a lot of insight
into the company and point out issues you
need to investigate

14.  EPS (Earning Per Share) =
Net Income
Number of Shares
 Dividend per Share =
Dividends
Number of Shares
 P/E Ratio =
Stock Price
EPS
(How much Dollars makes one Dollar Profit)
 Dividend Payout Ratio =
Dividends
Net Income

16.  Return on Equity (ROE) =
Net Income
Equity Average
(How much Equity makes Money)
 Return on Sales (ROS) =
EBIT
Sales
(How much Sales process makes Money)
EBIT ( Earning Before Interest and Taxes)

18.  EPS Growth Rate =
Current EPS
Previous EPS
-1
 Dividend Growth Rate =
Current Dividend per share
Previous Dividend per share
-1
 Sales Growth Rate =
Current Sales
Previous Sales
-1
 EBIT Growth Rate =
Current EBIT
Previous EBIT
-1
 Net Income Growth Rate =
Current Net Income
Previous Net Income
-1

20.  Current Ratio =
Current Assets
Current Liabilities
(cash to pay debt)
 Quick Ratio =
(Cash +Account Receivable)
Current Liabilities
(Available Cash to cover Liabilities)

22.  Inventory Turnover Ratio =
Cost of Sales
Inventories
(How many times Inventory converted to Sales)
 Receivable Turnover Ratio =
Sales
Accounts Receivable
(How many times Accounts Receivable converted
to cash)

24.  Total Debt to Total Capitalization =
(Short Term Debt +Long Term Debt)
(Short Term Debt +Long Term Debt+ Equity)
(How much the Debt in the capital)
 Long−Term Debt to Total Capitalization =
(Long Term Debt)
(Short Term Debt +Long Term Debt+ Equity)
(How much the Long Term Debt in the capital)
 Total Debt to Total Capitalization =
(Short Term Debt +Long Term Debt)
Equity
(How much the Debt to Equity)