Accounting & Valuation

Read these first

1. 01How the Three Statements Link Together

   The income statement, balance sheet and cash flow statement are not three reports. They are one model seen from three angles, wired together by two hinges. Get the wiring right and a change anywhere flows everywhere and still balances.

2. 02Reading a Balance Sheet

   A balance sheet is a photograph of what a company owns and who has a claim on it, taken on one specific day. Everything on it hangs off a single identity that cannot break, assets equal liabilities plus equity.

3. 03The Cash Flow Statement

   Profit is an opinion; cash is a fact. The cash flow statement rebuilds the bank balance from reported earnings, splitting every movement into operating, investing and financing, and it is the hardest of the three statements to dress up.

4. 04Accounting for Stock-Based Compensation

   Paying staff in shares is a real cost settled in a currency the company can print. The accounting freezes that cost at the grant date, which means the number on the income statement rarely matches what employees actually received or what shareholders actually gave up.

5. 05Building the Cash Flow Statement by the Indirect Method

   Give an analyst two consecutive balance sheets and one income statement and they can rebuild the entire cash flow statement from scratch. Every line of it is a balance sheet change wearing a different label, and one identity determines all the signs.

6. 06Capitalizing vs Expensing a Cost

   Two companies spend the same hundred million dollars. One reports it all as cost this year, the other spreads it over five. Both follow the rules, both end the period with identical cash, and their reported EBITDA differs by a factor of two.

7. 07Discounted Cash Flow Valuation

   A business is worth the cash it will hand you, shrunk for the fact that future money is worth less than money now. DCF turns that one sentence into a number, and most of the number usually comes from the part you can least defend.

8. 08Free Cash Flow

   The cash a business throws off after paying to keep itself running and growing. It is the number a valuation actually discounts, and unlike reported earnings there is no single official definition, which is exactly where the arguments start.

9. 09IFRS vs US GAAP: Differences That Matter to Analysts

   The same company, reporting the same year's results, can show a meaningfully different balance sheet and income statement depending on whether it follows IFRS or US GAAP, and an analyst comparing a US company to a European one has to know exactly where those gaps hide.

10. 10Reading a Bank's Financial Statements

    A bank's balance sheet is its inventory, loans and securities instead of widgets, and its income statement runs on a spread instead of a markup, which means the ratios that work for an ordinary company are close to useless for one.

11. 11The Sloan Accruals Anomaly

    Two firms report the same profit, but one collected the cash and the other booked receivables. Sloan showed the cash half of earnings persists better than the accrual half, and that share prices behave as if it did not.

Then the rest

1. 12Accrual vs Cash Accounting
2. 13Dividend Policy
3. 14Reading an Income Statement
4. 15Useful Lives, Salvage Value and Depreciation Policy
5. 16ASC 606 and the Five-Step Revenue Model
6. 17Auditor Opinions, Going Concern and Material Weakness
7. 18Capitalized Software and R&D
8. 19Capitalizing Operating Leases for Analysis
9. 20Channel Stuffing and Bill-and-Hold Sales
10. 21Classification Shifting Between Operating and Investing Cash Flow
11. 22Comparable Company Analysis
12. 23Contingent Liabilities, Provisions and Legal Reserves
13. 24Cookie-Jar Reserves and Big-Bath Charges
14. 25Deferred Revenue, Billings and RPO
15. 26Defined Benefit Pension Accounting
16. 27DuPont Decomposition of Return on Equity
17. 28Earnings per Share and Dilution
18. 29Earnings Quality and Accounting Red Flags
19. 30EBITDA and Adjusted Earnings
20. 31Effective Tax Rate vs Cash Tax Rate
21. 32Enterprise Value vs Equity Value
22. 33Equity Method, Consolidation and Control
23. 34Estimating the Cost of Equity
24. 35Financial Restatements and What They Signal
25. 36Funded Status, Discount Rates and Pension Surprises
26. 37Gross vs Net Revenue: Principal or Agent
27. 38How a Goodwill Impairment Is Calculated
28. 39How a Leveraged Buyout Model Works
29. 40Inventory Costing: FIFO, LIFO and Weighted Average
30. 41Maintenance Capex vs Growth Capex
31. 42Mining the Footnotes and MD&A
32. 43Modeling Dilution from RSUs, Options and Warrants
33. 44Modigliani-Miller and Capital Structure
34. 45Net Operating Loss Carryforwards
35. 46Non-Cash Charges and What Belongs in an Add-Back
36. 47Non-Controlling Interests in the Statements
37. 48Operating vs Finance Leases After IFRS 16 and ASC 842
38. 49Price Multiples: P/E, P/B and EV/EBITDA
39. 50Pro-Forma vs GAAP Earnings
40. 51Purchase Price Allocation and the Opening Balance Sheet
41. 52Reading an Insurer's Financial Statements
42. 53Receivables and the Allowance for Doubtful Accounts
43. 54Receivables Factoring and Supply-Chain Finance
44. 55REIT Earnings: FFO and AFFO
45. 56Return on Invested Capital
46. 57SaaS Metrics: ARR, Net Revenue Retention and CAC Payback
47. 58Securitization, Derecognition and Hidden Leverage
48. 59Segment Reporting and What It Reveals
49. 60Serial Restructuring Charges and Recurring One-Offs
50. 61Share Buybacks
51. 62Terminal Value Methods
52. 63Testing a Long-Lived Asset for Impairment
53. 64The Accrual Ratio and Cash Conversion
54. 65The Dividend Discount Model
55. 66The Fair Value Hierarchy: Level 1, 2 and 3
56. 67Weighted Average Cost of Capital
57. 68Working Capital and the Cash Conversion Cycle
58. 69Foreign Currency Translation vs Remeasurement