What is the best financial statement to evaluate a company?
I've been asked the question in multiple finance interviews recently and have answered the cash flow b/c investors want to know how much cash a business generates to grow the company, payback debt, etc. However, some people think balance sheet is better cause it tells you the "financial health" of a company for which I can see the argument as well. Show
What do you guys think? What is a financial statement?In US financial reporting there are four major financial statements: the income statement (sometimes referred to as the profit / loss statement), the balance sheet, the statement of cash flows, and the statement of stock holders equity. These offer a financial, quantitative, look at different elements of the business. Income Statement: Walks from revenue to net income on an accrual basis - valid over a given period (ex. Quarter
1). Between the Income Statement, Balance Sheet, and Statement of Cash Flows, Which is the Most Important? (Interview Question)This common interview question can have several answers if well defended; however, the statement of cash flows is the "correct answer" in most settings. The reason? "Cash is king." When compared to the income statement - the statement of cash flow is prefered as explained by @squawkbox", an investment banking analyst: The income statement is prone to "errors" from accounting conventions. For example, whenever Apple sells an iPhone --> it can only recognize 3/24 of the revenue for the phone in the current quarter. However they are still being paid cash for the phones from AT&T (ignoring A/R). When compared to the balance sheet - the statement of cash flows is prefered: While the balance sheet offers a snap shot of the obligations and the assets of the business, assuming that you only have one balance sheet you do not know how profitable the business is each period. However, @rrrrr01", an investment banking associate, makes the valid case that:
Of the three statements, which two are the most important? (Interview Question)When facing this question - the answer should be the balance sheet and the income statement - because with those two filings you can create the statement of cash flows (assuming that you have the prior period and current period balance sheet). Important to note - an increase in an asset is a cash draw and an increase in a liability is a cash bonus. Statement of Cash Flows Build Up ExamplesAfter answering that you can build the statement of cash flows - you may be asked to provide some of the ways you build the statement of cash flows - some examples are provided below:
Steps to Build the Statement of Cash FlowsStep One - Find the change in Balance Sheet items between period 1 and period
2: Step Two - Classify these changes on the Statement of Cash Flows: Step Three - Adjust for non-cash charges and net income from the income statement for the period: Source:http://www.ifrsbox.com/how-to-prepare-statement-of-cash-flows-in-7-step… Preparing for investment banking interviews?The WSO investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry. This guide will help you learn how to answer these questions and many, many more. Investment Banking Interview Course Here Which financial statement is best when valuing a company?Because the balance sheet identifies a company's assets and liabilities, it can be a good place to start the valuation process, especially for companies that rely heavily on tangible assets (such as manufacturers and real estate holding companies).
What financial statements should you evaluate?The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What is the most reliable type of financial statement?One of the most important resources of reliable and audited financial data is the annual report, which contains the firm's financial statements. The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential.
What are the 4 most important financial statements?4 Types of Financial Statements That Every Business Needs. Balance Sheet. Also known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs. ... . Income Statement. ... . Cash Flow Statement. ... . Statement of Owner's Equity.. |