Cheat sheet: Financial accounting

The three core financial statements: income statement, cash flow statement and balance sheet, the three pillars of financial analysis.

Income Statement: Revenues − Cost of goods sold (COGS) = Gross Profit − Operating expenses (SG&A, R&D) = EBITDA − Depreciation, amortisation and provisions (D&A) = Operating income (EBIT) − Net interest (Interest) = Earnings before tax (EBT) − Corporate income tax (Tax) = Net Income.

Cash Flow Statement: start from Net Income, add back D&A and other non-cash charges and subtract the change in working capital (ΔWC) to get Cash Flow from Operations (CFO). Capital expenditure (CapEx) makes up Cash Flow from Investing (CFI). Debt and equity issuance, minus repayments and dividends, makes up Cash Flow from Financing (CFF). Together they give the change in cash (ΔCash).

Balance sheet: the fundamental balance Assets = Liabilities + Equity. On the assets side, non-current assets (property, plant & equipment, intangible assets and goodwill, long-term investments) and current assets (cash and cash equivalents, inventories, accounts receivable). On the other side, shareholders' equity (share capital and share premium, retained earnings and reserves, net income for the year from the P&L) and liabilities (suppliers and short-term debt, long-term debt, tax liabilities and provisions).

P&L → cash flow statement: Net Income feeds the first line of CFO, to which non-cash charges (D&A) and the impact of the change in working capital are added back.

P&L → balance sheet: Net Income, minus dividends paid, increases shareholders' equity through reserves or retained earnings.

Cash flow statement → balance sheet (cash and debt): the net change in cash updates the Cash line on the assets side, while financing flows (CFF) adjust financial debt on the liabilities side.

Cash flow statement → balance sheet (investments): CapEx increases the gross value of fixed assets (PP&E), offset by depreciation and amortisation (D&A).