Financial Statements Basics
Read an Income Statement, Balance Sheet, and Cash Flow like a banker.
The Income Statement
The income statement (P&L) shows performance over a period. The flow is: Revenue − COGS = Gross Profit − Operating Expenses = Operating Income (EBIT) − Interest − Taxes = Net Income.
Add back D&A to EBIT to get EBITDA, the cash-proxy bankers love because it strips out capital structure and accounting choices.
Key Concepts
The Balance Sheet
Assets = Liabilities + Equity. It's a snapshot at a point in time.
Current assets (cash, A/R, inventory) and current liabilities (A/P, accrued, short-term debt) drive working capital. Long-term: PP&E, intangibles, goodwill on the asset side; long-term debt and equity on the other.
Goodwill arises when a company is bought for more than its tangible book value — the premium is parked on the buyer's balance sheet.
Key Concepts
The Cash Flow Statement
Three sections: Cash from Operations (start with Net Income, add back non-cash items, adjust for working capital changes), Cash from Investing (CapEx, acquisitions), Cash from Financing (debt issuance / repayment, equity issuance / buybacks, dividends).
Free Cash Flow = CFO − CapEx. This is what's available to all capital providers and what DCF models discount.
Key Concepts
How the Three Statements Link
This is the classic interview question. Net Income from the IS flows to the top of the CFS and into Retained Earnings on the BS. D&A flows from the BS (reducing PP&E) through the IS and is added back on the CFS. Cash at the bottom of the CFS becomes the new cash line on the BS.
If you can walk through a $10 D&A increase across all three statements, you've passed the first technical screen.
Key Concepts