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see the line ˜˜other non-operating expense™™ here, in order to be
able to capture any such flows.
In some fields of analysis, EBITDA (Earnings before interest,
taxes, depreciation, and amortization) is an important number
because it shows operating earnings on a cash basis, since depre-
ciation and amortization are noncash expenses. In this case, you
may want to shift depreciation and amortization down a few lines
and the layout will look like the following sample to the EBIT
line. Below EBIT, the format will be the same as shown above.
This may not conform to the layout of the source data you are
using, but all the numbers remain accurate, and you will have an
EBITDA line in the model that you can use for other calculations.

À Cost of goods sold
¼ Gross profit
À Selling, general, and administration (SGA) expenses
À Operating expenses
¼ Earnings before interest, taxes, depreciation, and amortization
À Depreciation
À Amortization of intangibles
¼ Earnings before interest and taxes (EBIT)
À Other non-operating expense
À Interest income
À Interest expense
¼ Earnings before taxes (EBT)
À Taxes
¼ Net income
À Dividends
¼ Net to retained earnings

These are the basic elements of the income statement, and we
will use these and the format shown with the EBITDA line for
our modeling template.

The balance sheet is a snapshot of the company™s numbers at one
point in time: the end of the reporting period. Compare this with

Chapter 8

the idea behind the income statement, which contains numbers
that have been accumulated over the entire 12 months. The two
statements have different time frames, but they are presented as
of the same day. (By the way, as far as the language of accounting
is concerned, don™t be surprised to come across the expression
˜˜at December 31,™™ rather than the usual ˜˜on December 31.™™)

Current and Noncurrent
Current describes the span of time of the business period,
typically a year. So a current asset is an asset with a life of less
than a year. The same is true with a current liability. Basically,
unless there is a continuous addition to the account, a current
item on the balance sheet today would not be there in next year™s
balance sheet. For example, the particular accounts receivable on
the books in one year™s balance sheet would be gone by next
year™s balance sheet, given a typical collection period of no
more than several months. The accounts receivable shown in the
next year™s balance sheet are new receivables not yet collected at
that reporting date.
All shareholders™ equity is assumed to be noncurrent.

Items on a Balance Sheet
Following is a look at the ˜˜typical™™ balance sheet:

Marketable securities
Accounts receivable
Current assets
Total current assets
Fixed assets
Accumulated depreciation
Net fixed assets
Investment in affiliates

Income Statement and Balance Sheet Accounts 149

Other long-term assets
Total assets
Notes payable (short-term debt)
Accounts payable
Other current liabilities
Current portion of long-term debt
Total current liabilities
Senior debt
Subordinated debt
Other long-term liabilities
Total liabilities
Shareholders™ equity
Common stock
Preferred stock
Treasury stock
Retained earnings
Other equity account
Total shareholders™ equity
Total liabilities and shareholders™ equity

If you are still new to accounting, there is no need to be
anxious about understanding these accounts. Remember the
general description: assets are what you ˜˜have,™™ liabilities are
what you ˜˜owe,™™ and shareholders™ equity is what you ˜˜own.™™
Let™s look at the accounts one by one.

Cash Cash is cash.

Marketable Securities These are short-term securities held as
investments. They are convertible to cash at a moment™s notice.
A company may have them when it has excess cash and wishes
to produce a higher interest income from the holdings.

Accounts Receivable Moneys owed by a company™s customers
for services billed but not paid for. It is important that a company
collect on these as quickly as possible. Accounts receivable are

Chapter 8

a ˜˜loan™™ that the company makes to its buyers. Note that the
accounts payable section in the current liabilities section is the
reverse: it is a ˜˜loan™™ that a company gets from its suppliers.

Inventory Raw materials and other supplies needed for produc-
tion, or goods waiting to be sold.

Other Current Assets Anything else that is an asset and is not
a long-term asset.

Fixed Assets Generally any long-term asset used for produc-
tion. This is often called gross plant, property, and equipment
(Gross PPE).

Accumulated Depreciation This is the total amount of cost that
has been used up or depreciated over the life of the fixed assets.

Net Fixed Assets Fixed assets less accumulated depreciation. As
you work with different models for different analytical needs,
you may find that you need to show only this line and not
(gross) fixed assets and accumulated depreciation on the balance
sheet. This line is often called Net PPE.

Investment in Affiliates This shows the investments held by the
company under the equity method. When a company holds
between a 20 and 50 percent interest in another company and
has significant influence (but not a controlling interest) over that
company, that investment is held in this category.

Goodwill When a company buys another company using the
purchase accounting method and pays a price that is higher
than the net assets (the value of the assets less the value of the
liabilities), the difference is held in this account. There is no
identifiable asset to this account”it™s just a place to note that
the purchase price was more than the value purchased. Such
goodwill used to be required to be amortized over a set period
of years, up to 40 years, depressing the earnings figure. (From a
cash flow point of view, there is no effect, as the amortization is a

Income Statement and Balance Sheet Accounts 151

noncash expense.) However, this rule was changed in 2001, and
goodwill can remain unamortized, subject only to a periodic test
for impairment.

Intangibles Though similar to goodwill in that its amortization
is a noncash expense, intangibles represent identifiable assets such
as patents and trademarks and proprietary technology.

Other Long-Term Assets These are other assets that are non-
current. Depending on your modeling needs, you can include
more than one long-term assets account.

Short-Term Debt Debt payable within one year. There is another
account in the current liabilities that is also debt, and that
is ˜˜Current portion of long-term debt.™™ This is the portion of
long-term debt that is known to be payable within the year
because of a company debts™ amortization schedules. You can
list this as a separate account, or you can show this as part of
the short-term debt account.
In general modeling, you may not need to show the current
portion of long-term debt in the current liabilities section. This
is because it is usually more useful to see all of the long-term
debt as a total in the long-term liabilities section. In this way, you
will not make the mistake of overlooking the amount in the
current section. Doing it this way understates the current liabil-
ities section, of course. The only ratios that are subsequently
affected will be the current ratio, which looks at the ratio of cur-
rent assets to current liabilities, and the quick ratio, which looks at
(current assets less inventory) to current liabilities. If these two
ratios play critical measures for the type of analysis you do, then
by all means you should have current liabilities include the
current portion of long-term debt.

Accounts Payable This represents the amounts owed to suppli-
ers for products or services that the company has purchased.
An important point to make here is that accounts payable are like

Chapter 8

an interest-free short-term loan from a company™s suppliers.
The longer a company can delay in paying off the suppliers,
the longer it holds on to ˜˜free money.™™

Accrued Expenses These are expenses that the company has
incurred, but has not paid off yet.

Other Current Liabilities These represent any accounts that the
company has to pay off within one year, such as taxes payable or
dividends payable.

Debt These can include bank debt, bonds, and subordinated
debt, to name a few examples.

Long-Term Liabilities Any other obligations that are noncurrent.

Common Stock This lists the amount of common stock issued
at par. Common stock pays dividends.


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