Key Concepts
Three Statements LinkNet Income flows to Retained Earnings (Balance Sheet) and CFO (Cash Flow). Changes in working capital bridge NI to cash.
Deferred TaxesTemporary differences between book and tax accounting. DTL when taxable income < book income; DTA when opposite.
LIFO vs FIFOInventory costing methods. LIFO = last-in-first-out (lower taxes in inflation); FIFO = first-in-first-out (higher ending inventory).
Operating Lease vs Finance LeaseOperating lease = off-balance-sheet expense; Finance lease = capitalized asset + liability. ASC 842 now requires almost all leases on balance sheet.
Goodwill ImpairmentWhen carrying value of reporting unit exceeds fair value. Tested annually; write-down reduces equity but is non-cash.
EBIT vs EBITDAEBIT = operating income; EBITDA = EBIT + D&A. EBITDA closer to cash flow but ignores capital intensity.
Working CapitalCurrent Assets − Current Liabilities. Positive = company can pay short-term obligations. Negative may indicate efficiency (e.g., Walmart).
CapEx vs OpExCapital expenditures create long-term assets (balance sheet); Operating expenses are consumed in current period (P&L).