Breaking Into Wall Street - The 3 Financial Statements
($ in Thousands)
Assumptions & Model Output
Starting Assumptions:
Tax Rate:
25.0%
Share Price ($ as Stated):
Shares Outstanding (Thousands):
$
Initial Cash Balance ($ in Thousands):
Income Statement Changes:
Year 1
$
1.00
1,000
1,000
Year 2
Cash Revenue Increases By:
Depreciation Period on CapEx (Years):
Depreciation:
Accelerated Tax Depreciation:
Finance Lease Annual Cash Payment:
Finance Lease Term (Years):
Finance Lease Depreciation:
Discount Rate for Finance Leases:
Interest Expense on Finance Lease:
10
Operational Balance Sheet Events:
Year 1
Year 2
Cash Flow Statement Events:
Accounts Receivable (Linked to Revenue):
Increases By:
Decreases By:
Sign Operating Leases:
Operating Lease Depreciation:
Operating Lease Principal Repayment:
Prepaid Expenses (Linked to General & Administrative):
Increases By:
Decreases By:
Buy Financial Investments:
Sell Financial Investments:
End of
Year 1
End of
Year 2
-
-
10
Capital Expenditures:
-
6%
Inventory (Linked to COGS):
Increases By:
Decreases By:
Issue Long-Term Debt:
Repay Long-Term Debt:
Accrued Expenses (Linked to General & Administrative):
Increases By:
Decreases By:
Operating Lease Annual Cash Payment:
Discount Rate for Operating Leases:
Interest Expense on Operating Lease:
6%
Interest Rate on Financial Investments:
Interest Income:
2%
-
Issue Finance Leases:
Repay Finance Lease Principal:
Issue Preferred Stock:
Repay Preferred Stock:
Accounts Payable (Linked to Sales & Marketing):
Increases By:
Decreases By:
Common Dividends Issued:
-
Interest Rate on Debt:
Interest Expense on Debt:
4%
Preferred Stock Coupon:
Preferred Dividends:
8%
-
Deferred Revenue (Linked to Revenue):
Increases By:
Decreases By:
Cash BEFORE Any Changes:
-
Issue New Common Shares:
Repurchase Common Shares:
$
1,000
$
1,150
$
1,300
-
Income Statement:
Balance Sheet:
Period of Period of
Year 1
Year 2
Revenue:
$ 1,000
$ 1,000
Cost of Goods Sold (COGS):
100
100
Gross Profit:
900
900
Operating Expenses:
Sales & Marketing:
Research & Development:
General & Administrative:
Rental Expense:
Total Operating Expenses:
Depreciation:
Lease Depreciation:
Operating Income:
(+) Interest Income:
(-) Interest Expense:
Pre-Tax Income:
(-) Income Taxes:
Net Income (Profit After Taxes):
(-) Preferred Dividends:
Net Income to Common:
$
300
250
150
700
300
250
150
700
-
-
200
200
200
200
(50)
(50)
150
150
$
150
150
Tax Schedule:
Book Pre-Tax Income:
(+) Book Depreciation:
(-) Tax Depreciation:
Cash Taxable Income:
Beginning NOL Balance:
(+) NOLs Created:
(-) NOLs Used:
Ending NOL Balance:
Period of Period of
Year 1
Year 2
$
200
$
200
200
200
ASSETS:
Current Assets:
Cash:
Accounts Receivable:
Prepaid Expenses:
Inventory:
Total Current Assets:
$
1,000
1,000
End of
Year 1
$
1,150
1,150
Long-Term Assets:
Net Property, Plant & Equipment (Net PP&E):
Operating Lease Assets:
Finance Lease Assets:
Financial Investments:
Deferred Tax Assets (DTAs):
Total Long-Term Assets:
Total Assets:
LIABILITIES & EQUITY:
Current Liabilities:
Accounts Payable:
Accrued Expenses:
Deferred Revenue:
Total Current Liabilities:
$
1,000
$
-
Long-Term Liabilities:
Debt:
Operating Lease Liabilities:
Deferred Tax Liabilities (DTLs):
Finance Lease Liabilities:
Total Long-Term Liabilities:
Equity:
Common Shareholders' Equity:
Preferred Stock:
Total Equity:
End of
Year 2
$
1,300
1,300
-
-
$
1,150
$
-
$
Period of Period of
CASH FLOW FROM OPERATIONS:
Year 1
Year 2
Net Income to Common:
$
150
$
150
Non-Cash Adjustments:
(+) Depreciation:
(+) Lease Depreciation:
(+/-) Deferred Income Taxes:
(+/-) Change in Op. Lease Assets:
(+/-) Change in Op. Lease Liabilities: Changes in Operating Assets & Liabilities:
Accounts Receivable:
Prepaid Expenses:
Inventory:
Accounts Payable:
Accrued Expenses:
Deferred Revenue:
Cash Flow from Operations:
150
150
1,300
$
-
-
-
-
1,000
1,000
1,150
1,150
1,300
1,300
CASH FLOW FROM INVESTING ACTIVITIES:
(-) Buy Financial Investments:
(+) Sell Financial Investments:
(-) Capital Expenditures:
(-) Additions to Finance Lease Assets:
Cash Flow from Investing:
-
-
CASH FLOW FROM FINANCING ACTIVITIES:
(+) Issue Debt:
(-) Repay Debt:
(+) Issue Finance Leases:
(-) Repay Finance Leases:
(+) Issue Preferred Stock:
(-) Repay Preferred Stock:
(-) Common Dividends Issued:
(+) Issue New Common Shares:
(-) Repurchase Common Shares:
Cash Flow from Financing:
-
-
Net Change in Cash:
Total Liabilities & Equity:
NOL-Adjusted Taxable Income:
Common Shares Outstanding (Thousands):
Cash Taxes Payable:
Balance Sheet Balanced?
Deferred Income Taxes:
Cash Flow Statement:
End of
Year 0
$
1,000
1,000
OK!
$
1,150
1,000
OK!
$
1,300
1,000
OK!
$
150
$
150
Net Operating Losses (NOLs) and Deferred Tax Assets (DTAs)
($ in Thousands)
Assumptions & Model Output
Tax Rate:
Beginning Net Operating Loss (NOL) Balance:
Income Statement:
Year 0
Pre-Tax Income:
(-) Income Taxes:
Beginning NOL Balance:
(+) NOLs Created:
(-) NOLs Used:
Ending NOL Balance:
$
Year 1
Year 2
$
$ (200) $
100
25.0%
100
Year 3
300
<-- These are the "Book Taxes" on the Income Statement.
<-- Pre-Tax Income * Tax Rate.
<-- The NOL Balance itself is NOT on the Balance Sheet! It's a separate item!
<-- If Pre-Tax Income is negative, add it to the NOL balance; otherwise add $0.
<-- Apply the lesser of the total remaining NOLs, or the Pre-Tax Income..
…but if Pre-Tax Income is negative, just use $0 - nothing to offset.
NOL-Adjusted Pre-Tax Income:
Cash Taxes Payable:
Increase / (Decrease) in DTA:
Deferred Tax Asset (DTA):
<-- DTA will decrease each year that we use NOLs, and will increase whenever
we accumulate NOLs from taking losses.
Lesson Notes:
Scenario: In addition to Deferred Tax Liabilities (DTLs), created due to timing difference in items such as Depreciation, among others, there are also
Deferred Tax Assets (DTAs) - the opposite - which represent potential future tax savings .
Many items can comprise DTAs, but the most important one for modeling/finance/valuation purposes is the Net Operating Loss, or NOL.
Idea: If the company has lost money (negative Pre-Tax Income) in prior years, it can reduce its future Taxable Income with these losses and save money
in the future.
NOTE: The rules around NOLs depend heavily on the country/region you're in - in some countries there are expiration dates or requirements around their
usage, so we're covering a fairly simple, generic scenario here that could apply anywhere.
Scenario: A company suddenly turns profitable and starts recording positive Pre-Tax Income, but has several years of prior losses accumulated in its
NOL balance.
Cash Flow Statement and Balance Sheet Impact: If the DTA increases , then the company's cash flow decreases, and on the Balance Sheet, the
DTA is up and Cash is down to balance it.
Intuition: From the Income Statement, the company appeared to receive a Tax Benefit, or actual cash back from the government, when it took a loss,
but it did not do so in reality! Simply paid 0 in Cash Taxes.
If the DTA decreases , then the company's cash flow increases, and on the Balance Sheet, the DTA is down and cash is up to balance it.
Intuition: The NOL was used! So the company appears to have paid $25 in taxes from the IS, for example, but did NOT actually pay them out in cash!
IMPORTANT POINT: NOLs are NOT the same as Deferred Tax Assets! The DTAs represent only the tax savings potential arising from NOLs, so a
$100 NOL will be recorded as a $25 DTA. The full amount of the NOL itself is an "off-Balance Sheet" item.