Key Concept

This is a summary of the key concepts and techniques we covered in the seven sessions in our Investor module.

1. “How is the Company doing financially?”

Understanding, analyzing and interpreting financial statements (Chapters 1 & 2)

Key Concepts and Terminology

Chapter 1

• Purpose and components of 4 Basic Financial Statements

o Balance sheet

o Income Statement

o Cash Flow

o Changes in Shareholders’ Equity

• GAAP Concepts

o Accrual basis – revenue when the earnings process is substantially complete and collection is reasonably assured; expenses when incurred

o Depreciation – straight line vs. accelerated

o Income taxes – provision (expense), payable and deferred (balance sheet)

• Common measures of earnings

o Net Income – “the bottom line”

o Operating Income – from running the business, separate from non-operating revenues and expenses and special items (extraordinary items, discontinued operations, etc)

o EBIT (earnings before interest and taxes) – “pretax income”

o EBITDA (earnings before interest, taxes, depreciation and amortization) – often used as a short cut for cash flow from operating the business

• Common measures of cash flow

o Cash flow from operating activities, investing activities, financing activities

o Free cash flow – cash flow from operations after taxes, changes in working capital, and normal capital investments to maintain the business

o Discounted cash flow – a method that takes cash flows over time and takes into consideration the time value of money (chapter 9)

• Common measures of Company Value

o Market Value

o Book Value

o Intrinsic Value

• Common measures of Income – economic versus accounting

Chapter 2

• Ratio analysis (see...