Josh Aharonoff
Jul 6, 2023
Welcome to a knowledge-packed edition of Legit Numbers!
Whether you're a Finance & Accounting professional, a business owner, or a fractional CFO...there's something here for everyone
This week, I show you how Finance & Accounting can be art by walking you through my famous Periodic Table of Financial Metrics, and ABCs of Accounting.
We'll then end with a deep dive into the popular world of Auditing.
What we’ll be covering in this edition:
The ABCs of Accounting
The Periodic Table of Financial Metrics
The Auditors Handbook 📔
Let's dive in...
Won’t you sing along with me?
A
Assets
Items of Economic Value that you own / substantially control
B
Balance sheet
Snapshot of the business showing the Assets, Liabilities, and Owners Equity
C
Cash flow
The total cash entering & leaving your bank account
D
Depreciation
The wear and tear on the fixed assets in our business
E
EBITDA
Earnings Before Interest Taxes Depreciation & Amortization
F
Financial statements
The Income Statement, Balance Sheet, and Cash Flows
G
GAAP
Generally Accepted Accounting Principles
H
Historical cost
The cost to acquire an asset
I
Income statement
Show’s you the income & expenses of your business, and various levels of profitability
J
Journal entries
Your Debits & Credits
K
KPIs
Key Performance Indicators
L
Liabilities
Obligations & amounts owed to creditors of the business
M
Matching principle
An accounting principle that requires you to match the timing of income with the timing of expenses
N
Net income
Revenue - COGS - Operating Expenses + Other Income - Other Expenses
O
Owners Equity
Amounts contributed by owners + prior earnings
P
Profit
What you earn after costs
Q
Quick ratio
(Current Assets - Inventory) / Current Liabilities
R
Revenue
Your income
S
Shareholders
The owners of the company
T
Taxes
Amounts owed to the government
U
Unearned revenue
The amount of revenue collected / due, but not yet earned
V
Valuation
How much a company is worth
W
Working capital
Current Assets - Current Liabilities
X
X-Axis
The horizontal axis on your graph, typically for a timeline series
Y
Yield
The return on an investment
Z
Zero-based budgeting
A method of budgeting where you start from 0 and justify every financial activity
Any other examples you’d add?
Where chemistry meets profitability...
1️⃣ OCF Operating Cash Flow
Net Income + Other Non-Cash Items - Changes in Working Capital
2️⃣ FCF Free Cash Flow
Operating Cash Flow - Capital Expenditures
3️⃣ CCC Cash Conversion Cycle
Days of Inventory Outstanding + Days of Sales Outstanding - Days of Payables Outstanding
4️⃣ NCF Net Cash Flow
Operating Cash Flow + Investing Cash Flow + Financing Cash Flow
5️⃣ DCF Discounted Cash Flow
CF1 / (1+r)1 + CF2 / (1+r)2 + ... + CFn / (1+r)n, where CF is cash flow, r is the discount rate, and n is the number of periods.
6️⃣ PV Present Value
CF / (1+r)^t, where CF is cash flow, r is the discount rate, and t is the number of periods.
7️⃣ FV Future Value
CF x (1+r)^t, where CF is cash flow, r is the interest rate, and t is the number of periods.
8️⃣ PP Payback Period
Initial Investment / Annual Cash Flow
9️⃣CR Cash Ratio
(Cash + Marketable Securities) / Current Liabilities
🔟 CB Cash Burn
Cash from Operating Activities + Cash from Investing Activities
1️⃣1️⃣ UFCF Unlevered Free Cash Flow:
EBIT x (1 - Tax Rate) + Depr & Amort - CapEx - Incr in Net Working Capital
1️⃣2️⃣ LFCF Levered Free Cash Flow:
EBITDA - Taxes - Capital Expenditures - Changes in Net Working Capital - Interest Expense
1️⃣3️⃣ GP Gross Profit
Total Revenue - Cost of Goods Sold (COGS)
1️⃣4️⃣ EBITDA Earnings Before Interest Taxes Depr and Amort
Net Income + Int Expense - Int Income + Taxes + Depr + Amort
1️⃣5️⃣ EBITDA (M) EBITDA Margin
EBITDA / Revenue
1️⃣6️⃣ OI Net Operating income
Gross Profit - Operating Expenses
1️⃣7️⃣ NI Net Income
Total Revenue - Total Expenses
1️⃣8️⃣ NIM Net Income Margin
Net Profit / Revenue
1️⃣9️⃣ GPM Gross Profit Margin
Gross Profit / Revenue
2️⃣0️⃣ ROI Return on Investment
Net Profit / Total Investment
2️⃣1️⃣ ROE Return on Equity
Net Profit / Shareholders Equity
2️⃣2️⃣ ROA Return on Assets
Net Profit / Total Assets
2️⃣3️⃣ NOI Net Other Income
Other Income - Other Expense
2️⃣4️⃣ EPS Earnings per Share (EPS)
Net Profit / Total Shares Outstanding
2️⃣5️⃣ OM Operating Margin
Operating Income / Revenue
2️⃣6️⃣ PE Price-to-Earnings
Price per Share / EPS
2️⃣7️⃣ ROCE Return on Capital Employed
Operating Profit / Capital Employed
…and many more!
⬇️ Download this in high resolution via the link in the infographic
Auditing is a BIG field in Accounting
Here’s a summary of what you need to know:
➡️ What is Auditing?
Think of an auditor as an impartial party whose job is to provide assurance that your financial information is being presented fairly and in accordance with the appropriate accounting standards.
➡️ What do Auditors do?
Auditors assess the internal controls and risk management systems being used in an organization to identify any potential weaknesses
That typically involves preparing an audit based off of one of 2 standards:
➡️ Auditing Standards
SEC Compliant
• Conducted by Securities and Exchange Commission (SEC)
• It’s less stringent than PCAOB
PCAOB • Established by the Public Company Accounting Oversight Board (PCAOB)
• Required for public companies
➡️ Internal Controls & Risk Assessment
These are important to identify, analyze, and mitigate certain risks such as fraud, errors, and issues with compliance
Auditors will analyze both the existence of these controls, as well as the effectiveness of these controls
areas include:
Segregation of duties → here auditors assess whether there is a clear separation of responsibilities to present fraud or errors
Access Controls → here auditors evaluate the controls to ensure that sensitive information is being access only by authorized individuals ex: passwords, databases, or files
Going Concern → this is when an auditor assesses the likelihood of a company going out of business for the foreseeable future
Management Oversight → auditors assess whether management has been regularly reviewing financial transactions to ensure accuracy and to identify potential issues
Internal Audits → these are independent assessments conducted by internal auditors to ensure that everything is running efficiently and in line with regulations
Reconciliations → this is where auditors will evaluate whether information shown on the financial statements matches to different sets of financial records ex: bank reconciliations
➡️ How do Auditor do their job?
Here are a few common techniques
Statistical Sampling → using statistical principles
Judgmental Sampling → relies on an auditors professional judgement
Materiality assessment
➡️ What are the Audit Opinions?
These are opinions on the ultimate conclusion of the audit, and include:
Unqualified Opinion → All is good 😎
Qualified Opinion → Good, but there can be a specific area of concern 🤔
Adverse Opinion → You got problems 😱
Disclaimer of Opinion → When you're unable to conclude 🤷♂
PS: This is an excerpt from my Intro to Accounting course
You can take the course, or grab the e-book right here: https://bit.ly/3CN8Ny0
I hope you enjoyed this week's edition of Legit Numbers!
If you haven't already replied to say hello, please do and let me know how I can help - I reply to all of my emails personally :)
Till next time!