The Complete Financial Analyst Course

Course Notes
US GAAP and IFRS should converge at some point. However, the final steps towards such unification of accounting standards have not been taken.

GAAP IFRS
• GAAP are the rules companies in a • An entity called International
particular country must comply with Accounting Standard Board was
and adhere to when preparing formed to create an international
accounting entries and financial set of standards.
statements. • International Financial Reporting
• US GAAP stands for US generally Standards (abbreviated IFRS) is the
accepted accounting principles. product of its work

Every country has its own generally accepted accounting Adopted by many countries around the world
principles.

It is easy to have differences between one country’s Required for all domestic public companies in the EU,
GAAP and another country’s GAAP. and for all companies on European stock exchanges

Complications for companies operating internationally Small and Medium Enterprises do not have to use IFRS
and can report using local GAAP.

They must hire accountants and finance staff specialized The US is still considering the adoption of the IFRS.
in the accounting standards of all countries of operation.
 Financial accounting revolves around three main statements – the Income Statement (also known as Profit & Loss or simply P&L), the Balance Sheet, and the Cash Flow statement.
Each serves a different purpose and contains important information about how a business is running.

The Balance Sheet shows the assets

the business controls. 01 Also known as Profit & Loss (P&L)
• The Income Statement answers the questions:
• Answers the questions: ✓ How did the company perform throughout the
✓ What does a firm owe and own at a certain date? period under consideration?
✓ What is the company’s financial position? ✓ Did it produce a profit or a loss?
• The reason it is called a Balance Sheet is because Income • Prepared for a 1-year period or on a quarterly
total assets must equal liabilities plus Statement basis for larger companies
shareholders’ equity. Balance • The P&L also enables us to find important
Sheet trends, such as revenue growth.

02

02 Three
The Cash Flow statement shows Main
Statements Three main statements
us the movements of cash. Cash Flow
It answers the question: Statement You will find these statements in
every company’s annual report.
✓ How much cash did the company make during
the period under consideration and
where did it come from?

03
 Two types of revenue: Net Sales and Other Revenues. When we talk about revenues and we want to categorize them, we must ask one fundamental question:
Is this a type of revenue that is part of the firm’s core business? This distinction has its own merit. When someone values a business, they are mainly interested in its core activities.

• Also known as Net Sales

• This item represents an inflow of economic resources.
• Usually, the main revenue for a firm is its day-to-day sales.

• Companies can and do make money outside their core operations.

• For example, they can earn money by renting some of their real estate.

TOTAL REVENUE • The sum of Revenue and Other Revenue equals Total Revenue.
 Now that we have talked about Net Sales and Other revenue, it is time to focus on costs.
Cost of goods sold are expenses necessary to produce the goods the firm sells.

Cost of materials used Gross Profit

• Materials used to create the goods • Total revenues – Cogs = Gross Profit
• E.g. raw materials, transport, process, • Gross Profit directly shows us how much
packaging, etc. our business makes from its core activity.
• A negative Gross Profit would mean we
are selling our products at a loss.

COST OF
GOODS SOLD

Personnel costs
• The amount we’ve paid to personnel
directly involved with the production of
the goods.
Next, we will have the other large category of costs - Selling, General and Administrative expenses (SG&A). Also known as operating expenses. SG&A may include advertising ,
salaries of management and personnel not directly involved with production, office rent, utility bills, etc.

The sum of Net Sales and Other Revenue

equals Total Revenue. Operating expenses

EBITDA TOTAL
COGS SG&A
REVENUE

Stands for Earnings before Interest, Tax, The expenses necessary to produce the
Depreciation and Amortization. goods the firm sells.
EBITDA shows how much we’ve made
once we’ve considered both direct and
indirect expenses.
 D&A are two accounts that reflect the “using up” of tangible and intangible assets.

Tangible Intangible
assets assets

DEPRECIATION AMORTIZATION
Every year, the plants a company Examples: goodwill, licenses,
owns become one year older; copyrights, etc.
therefore, their value is reduced.
EBIT

EBITDA

EBIT
Earnings before Interest and Taxes.
Another measure of operating profitability.
Companies spending a constant amount on
D&A every year prefer to use EBIT.
Finally, these are another two cost items you will find in an Income statement. Once all expenses are considered, we arrive at the bottom line, which is called Net Income. This is the
excess of revenues over expenses, the profitability of a business after accounting for all costs.

INTEREST EXPENSES TAXES

• The costs a company bears for • Every firm pays corporate taxes that
receiving financing. are proportional to pre-tax profit it
• A firm receives bank loans and pays generated.
interest expenses for the amounts it • The rules according to which pre-tax
owes. income is measured may vary,
• Interest expenses are registered in depending on the country where the
the company’s income statement as a company operates.
cost.
A Balance Sheet is a statement that shows what a company owns and owes. Every Balance Sheet has two sides. On one side are the firm’s ASSETS – what the company owns, and on
the other side are the company’s liabilities and equity – what the company owes.

• SHOWS THE FIRM’S LIQUIDITY. • ALSO CURRENT ASSETS, that can

• Indicates how much of a firm’s easily be converted in cash.
assets are cash or can easily be • The account shows the value of 1)
converted into cash. raw materials, 2) goods in the
CASH ACCOUNT INVENTORY process of elaboration, and 3)
• A business cannot function finished goods.
properly if sufficient cash is not
available for its day-to-day
operations.

ASSET ACCOUNTS
Or what the company owns
• PROPERTY, PLANT, AND
EQUIPMENT (PP&E) are a group
of assets that are vital to
• AKA TRADE RECEIVABLES business operations, but cannot
• Indicates the money owed by be easily liquidated, i.e. they are
customers. non-current assets.
ACCOUNTS
• Trade receivables are current RECEIVABLE PP&E • The value of PP&E is depreciated
assets. every year.
 Now that we’ve covered the assets we will find in a firm’s Balance Sheet, it is time to focus our attention on the liability side.

• When a company buys raw materials for its production process, it

01
Accounts
registers the amount in accounts payable until the actual payment has
been made.
• Includes payments owed to suppliers for raw materials, electric energy,
payable IT support, new equipment, etc.

02
• Appears on the Balance Sheet of a company when it receives external
financing, e.g. a bank loan.
• When we have an agreement with one supplier to repay them in a
Financial
period, exceeding 180 days, that is also a financial liability.
liabilities

03
LIABILITIES • We can have different types of taxes, such as income tax, value added
tax, regional or state tax, and so on.
• A very complicated issue because we can have various types of taxes
Tax Each type of taxes could be due at different points of time.
liabilities

04
Provisions • This is money a company has set aside for future obligations.
• An example of such situation is when another firm sues us, and we
should set money aside until the trial ends.

WHEN WE OWE MONEY, WE ARE INTERESTED IF THAT’S AN OBLIGATION WE MUST

PAY IN THE NEXT 12 MONTHS OR IT CAN BE POSTPONED.
On the same side of liabilities, we have ownership claims. This is capital the firm technically “owes” to shareholders. The firm won’t repay shareholders literally, but will try to pay
them a decent amount of dividends if its business succeeds over the years. Most frequently, ownership claims are referred to as shareholders’ EQUITY.

PAID-IN
CAPITAL • The firm’s starting capital
• And any money that comes in later if
shareholders decide to increase capital.

RETAINED
EARNINGS • Profits that haven’t been distributed as dividends.
• Instead, stakeholders prefer to fuel the growth of the
business with these funds.

NET
INCOME • The profit we’ve made this year.
• If the company produces losses, then they
decrease this amount.
 THANK YOU!
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