3 Minutes Promo Video

Who am I ?

• Law School.

• International Business.

• Private Trader.

• MBA.

• Financial Analyst.Gennaro Cuofano

Why is this course different ?

20%

80%

Pareto Law

Success

Become a Financial Analyst from Scratch

• Introduction and Overview.

• Become an Accountant from Scratch.

• Income Statement.

• Balance Sheet.

• Cash Flow Statement.

• Ratio Analysis.

• Putting it all together.

Defining Financial Accounting“Numbers have life, they are not just symbols on paper” Shakuntala Devi.

What is Financial Accounting?

Foundation

Accounting

Financial Accounting

Corporate Finance

Investment Banking

Path to Become a Finance Professional

Private Equity Hedge

FundsVentureCapital

What happens to a house without foundation?

• No house can be built without foundation.

• The foundation will defend the house against any natural catastrophe.

• The house will last forever.

Let’s Lay the Foundations Now...

Accounting is the Foundation Accounting

Financial Accounting

Corporate Finance

Investment Banking

Lay the Foundations

Become an Accountant from scratch

• What is double entry ?

• What is an account ?

• How to build a COA (Chart of accounts).

• How to record Accounts with double-entry system.

• What is the General Ledger ?

What is Double Entry ?

Cash (Asset) Revenue (Income)

Company A Receives $100 cash from Customer B for the service rendered

Note: This is what Happens from company A Perspective

Debit Credit Debit Credit$100 $100

What is an account ? How to classify them.

• Assets.

• Liabilities.

• Owner’s Equity.

• Revenue/Income.

• Expense.

An account is a record where debit and credit amounts are collected.

How to buy an asset?

AssetsLiability

Equity

What is a Chart of Account (COA)Coding System used by accountants to categorize accounts

AssetsLiability

EquityIncome

Expense

1xxx2xxx

3xxx

4xxx

5xxx

How to Record Entries for each Account

AssetsLiability

EquityIncome

Expense

up

Debit Credit

downdown up

down up

down upup down

What is the GL?

AssetsLiability

EquityIncome

Expense

- Detailed Description of the main Accounts ant sub-accounts - From GL we derive all the main financial reports- Useful for auditing

Why is financial accounting so important?

• Lay the foundation to value the business (analysis).

• knowing how the business is doing (performance).

• Regulatory purpose (IRS, Tax Return).

Financial Statement from Scratch

• What is Financial Statement?

• How is it organized?

• The Income Statement

• The Balance Sheet

• The Cash Flow Statement

Financial Statement in Real lifeYou go to the doctor...

• Your habits during the year

• Will you be healthy in the future?

• X-Ray to picture your organism in that particular moment

What is Financial Statement?

The current picture of the business in that particular moment

The Habits of the business during a period of time

Business Health in the future

The Income Statement (IS or P&L)

• What is an Income Statement?

• Income Statement - Main features

• Total Revenue

• Total Expenses

• Net Income

What is an Income Statement

• Income Statement or Profit and Loss statement assesses if the business incurred a Net Profit/Loss. (Profitability)

• “Is the business generating enough revenues to cover expenses?”.

• Enough Revenues means: “The business is able to cover its operating and not operating expenses, pay taxes, interest on debt and still make money”.

Income Statement - Main features

• Total Revenue

• Total Expense

• Net Income

Total Revenue

Price / Unit(price per unit)

$1

Units Sold(Volume)

100x = $100

Generated by normal operations of the business

Generated by other sources of income

Interest Income

Revenues Other Income

Core Business Operations MatrixAre these expenses moving as result of sales volume?

YES NO

Variable: COGS (Cost of goods Sold) + Some Operating Expenses

- Cost of row materials (COGS)- Electricity can be both variable or

fixed (Opex)

Fixed Operating Expense

-Fixed Rent

TOTAL EXPENSESCore Business Operations

(Variable and Fixed Expenses)Outside Core Business

Operations (Non- Operating Expense)

Interest Expense

Net Income

Total Revenue - Total Expense = Net Income

Net Income will be reported in the Owner’s Equity of our Balance Sheet.

Net Profit

Net Profit

Net Income will be the starting point to build our Cash Flow Statement

Profitability Framework

Profit

Revenue Cost

Price/Unit Units Sold Variable Fixed

Cost/Unit Units Produced

The Balance Sheet

• What is a Balance Sheet?

• Balance Sheet - Main features

• Total Assets

• Total Liabilities + Total Equity

• Balancing the balance sheet

• BS or statement of financial position shows “the picture” of the business in that particular moment.

• BS tells what the company owns and owes.

• BS explains how the company financed its assets.

What is a Balance Sheet (BS)

Balance Sheet - Main Features

• Divided in two main Sections: Total Assets and Liabilities and Owner’s Equity

• Total Assets = Total Liabilities + Owner’s Equity

Total Assets

Assets that a company has at its disposal that can be easily converted in cash, within one operating cycle. Current assets are

crucial for the day-to-day operations of the business.

• Cash and Cash Equivalents

• Short term investments

• accounts receivable

• Inventories

• Pre-paid Expenses

Current Assets Non - Current Assets

Not liquid assets. They are kept on company’s books for accounting purposes. They can be Plans Property or equipments. For example

company A owns lands, buildings ,vehicles.These assets are subject to depreciation and amortization.

Amortization-

Depreciation

Building Patent

- Straight line- Double Declining Balance

Methods

Intangible AssetsTangible Assets

Equity

Total LiabilitiesCurrent Liabilities Non - Current Liabilities

What a company currently owed to its suppliers and creditors. Usually these are bills due in less than one

operating cycle.

• Accounts Payable

• Accrued expenses

• Short Term Notes Payable

• Long Term Debt

Usually liabilities due in more than one year

Value of the assets contributed by ownersBeginning Retained Earning

+/- Net Income/Loss During Period- Dividends Paid

= Retained Earnings

Balancing the Balance Sheet

=

If you buy a house for $100K

Cash$100K

Liabilities + Owner’s Equity $50K $50K

=Asset$100K

The Cash Flow Statement

• What is a Cash Flow Statement?

• Cash Flow Statement - Main features

• Operating Activities

• Investing Activities

• Financing Activities

What is a Cash Flow Statement (CFS)

• If the P&L and BS are produced on accrual basis, the CFS is on Cash Basis.

• Tells how much cash the business generated.

• Explains where the cash came from: Operations, Investment, Financing.

“Cash is King”

Cash Flow Statement - Main Features

• Start from Net Profit.

• Adjusted to reflect cash inflows or outflows.

• Divided in three main sections: Operating, Investing, Financing.

Cash Inflows vs. Cash Outflows Matrix

Balance Sheet Items + -

Assets

Liabilities

Cash Inflow Cash Outflow

- Assets decrease you will have a cash inflow. Assets increase you will have a cash outflow.- Liabilities decrease you will have a cash outflow. Liabilities increase you will have a cash inflow.

Δ - Delta ???In our case the Delta is the incremental cash flow. It means the cash changes on an incremental basis.

Balance Sheet 2015 2014

Acc. Rec. 110 100

Δ +10

Cash outflow!

Cash Flow from operating activitiesHow much cash is generated by ongoing operations?

Operating Activities Net Income

Adjustments for noncash items included in earnings

+ Depreciation & Amortization

+ Deferred Income Taxes

+ Deferred & Unearned Compensation

Δ Working Capital

Net Cash from Operating Activities

Gross Profit - Cash Basis

Revenue COGSCash Acc. Rec. Acc. Payable

$100

$50 $50Receivables Cash

$50

$20 $30Payables Cash

GP Accrual Basis = $50

GP Cash basis???

$50 $30$50 - $30 = $20

Understanding Working Capital

Working Capital + 2014 2015 Cash

Acc. Rec. 105 100

Inventories 105 100

Acc. Payable 90 100

Total 120 100

The working capital can be defined as the resources that the organization has at its disposal to sustain its operations in the short-term. A Business with low working capital may risk to be bankrupt for not being able to pay its obligations.

$5

$5

$10

$20

Going Back to Operating Cash Flow How much cash is generated by ongoing operations?

Operating Activities Net Income

Adjustments for noncash items included in earnings

+ Depreciation & Amortization

+ Deferred Income Taxes

+ Deferred & Unearned Compensation

Δ Working Capital

Net Cash from operating activities

Working Capital = Current Assets - Current Liabilities

Cash Flow from investing activities

Capital Expenditure (CAPEX).

How much cash has been invested in the business for future growth?

Money spent on acquiring or upgrading assets that have a life longer than one accounting cycle and that will generate profits.

You own an apartment and you rent it, you will spend money for:

Clean the apartment (Maid) Furnishing (Buy Kitchen stove)

Op. Exp. Income Statement

Cap. Exp. (Equipment) Balance Sheet

- Amount Spent- Useful Life- Future Benefits

Is the company generating sufficient cash to pay future dividends?

Capital Expenditure Matrix

Balance Sheet Items + -

Capital Expenditure (property, plans and equipment)

Cash Inflow Cash Outflow

Going Back to Cash Flow from investment activities

Investing Activities

Δ CAPEX

Net Cash from Investing Activities

How much cash has been invested in the business for future growth?

Cash Flow from financing activitiesHow is the company financing its growth/expansion? debt/equity

Financing ActivitiesΔ Notes Payable

Δ Short-term debt

Δ Long-term debt

Δ Bonds Payable

Δ Common Stock

Δ Retained Earnings

Net Cash from Financing Activities

Financing Activities Matrix

Financing Activities + -

Notes Payable

Short-term debt

Long-term debt

Bonds Payable

Dividends

Cash Flow Statement Operating Activities

Net IncomeAdjustments for noncash items included in NP earnings + Depreciation & Amortization + Deferred Income Taxes + Deferred & Unearned CompensationΔ Working CapitalNet Cash from Operating Activities

Investing Activities Δ CAPEX

Net Cash from Investing Activities

Financing ActivitiesΔ Notes PayableΔ Short-term debtΔ Long-term debtΔ Bonds PayableΔ Common StockΔ Retained EarningsNet Cash from Financing Activities

Become a Financial Analyst

Accounting

Financial Accounting

Corporate Finance

Investment Banking

Ratio Analysis

Ratio AnalysisWill the company...

Meet its obligations in the short term? (within one year) Liquidity

Produce enough revenues to cover its expenses? Profitability

Meet its obligations in the short and long term? (over one year) Solvency

Use its assets and liabilities efficiently? Efficiency

Liquidity

Current Ratio Quick Ratio (Acid Test

or Liquid Test

Absolute Ratio

Current AssetsCurrent Liabilities

Liquid AssetsCurrent Liabilities

Absolute AssetsCurrent Liabilities

(Current Assets- Inventory

- Pre-paid Expenses)

(Liquid Assets- Accounts Receivables

Cash+ Cash On Hand

+ Marketable Securities)

2:1

1:1

0.5:1

1:1

Below1:1

Below 0.5:1

Profitability Ratios

Gross MarginRatio

OperatingProfit Margin

ROA

Gross ProfitSales

Op. ProfitSales

Net IncomeTotal Assetsx100%

x100%

Revenue - COGS

Revenue - (COGS + Operating Expenses)

ROCE

EBITCapital Employed

Operating ProfitFixed Assets + Current Assets

- Current Liabilities

Compare with previous year or use comparable

DebtEquity

SOLVENCY

Leverage Interest Coverage

Ebit/EbitdaInterest Expense

Efficiency

AR Turnover Ratio Inventory Turnover Ratio Total/Fixed Assets Turnover Ratio

RevenuesAverage AR

COGSAverage Inventory

RevenueAverage Total/Fixed Assets

x 100% x 100% x 100%

Why ROE does not work?

ROE = Net Income

Shareholder’s Equity

Buyback Dividends Debt

How to make the ROE more reliable?...

Dupont AnalysisCreated in 1920 by Dupont corporation it broke down the ROE in three steps

ROE = Net Profit Margin * Asset Turnover * Equity Multiplier

Operating Efficiency

Net Income Sales

x SalesAverage Assets

Average AssetsAverage Equity

x

Net Income Average Equity

= ROE

Asset use Efficiency Financial Leverage

What’s next ?

Corporate

Past Future

Financial Accounting

How did the business perform ? How to maximize the value of the business ?

Corporate

Value Maximization

Future

Uncertain

Risk Danger Opportunity

Become a Financial Analyst from Scratch n.2

• What is Corporate Finance

• Risk Assessment

• Valuation techniques

See you soon...

Solution Sheet 1

• 1. You increase cash (asset) by recording a debit transaction, and increase sales (income) by recording a credit transaction.

• 2. You increase equipment (asset) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.

• 3. You increase cash (asset) by recording a debit transaction, and increase loan (liability) by recording a credit transaction.