help: how does depreciation or cash flow through the sheets?
I know this is probably simple stuff for you guys, but I have often seen questions about how depreciation and/or cash "flow through the sheets" when i look at i-banking interview prep materials.
I was wondering if someone can explain the correct way to answer these questions or point to a useful reference online that might clarify the connections between the financial statements.
also another thing I have been told to understand is which multiples are used to value companies in certain industries. can anyone shed some light on this or point to good reference?
thanks in advance, and sorry for my confusion
Here's some key highlights about how the statements flow and connect with each other: a. Net Income on the Income Statement equals the Net Income at the beginning of Statement of Retained Earnings. b. The ending value for the Statement of Retained Earnings equals the retained earnings reflected on the Balance Sheet. c. The ending cash value on the Statement of Cash Flows should equal the cash reflected on the Balance Sheet.
P/E ratios by industry can be found via Yahoo: http://biz.yahoo.com/p/industries.html
Hope that helps!
:-)
to specifically answer your question: depreciation is a non-cash expense, it hits the IS thereby lowering your NI as well as your tax burden; the depreciation for a given period would be added to your accumulated depreciation on your BS; on the CF you would add depreciation back because its a non-cash expense
when it comes to topics like this, instead of memorizing answers i'd try to fundamentally understand what is happening; once you grasp the concept that its a non-cash expense its fairly easy to explain how it flows using logic
In terms of valuation multiples the big 3 are EV/EBITDA, Price/Book Value, & P/E
Depending on the industry, certain multiples might be more relevant. For example, Price/Book is more relevant for industrial companies than internet companies in which numbers might not reflect true value.
Other ratios people will include are PEG ratios, EV/EBIT, ROE, ROI
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