Module 2: Accounting Concepts, the Financial Statements, and Interview Questions

In this module, you’ll learn the fundamental concepts of accounting, including the three
financial statements, cash vs. non-cash revenue and expenses, and how companies record
short-term and long-term changes.
You’ll also learn about more advanced topics, such as U.S. GAAP vs. IFRS, the differing
treatments of operating leases, and net operating losses (NOLs) and deferred taxes.
Toward the end, you will learn how to use your knowledge to project, link, and analyze the
financial statements, calculate Free Cash Flow and metrics like ROE and ROIC, and answer the
most common interview questions about accounting and the financial statements.

02-01: Income Statement Overview, and Why We Need the Financial Statements (15:31)
In this lesson, you’ll learn why we need the financial statements to determine a company’s
“cash flow,” and you’ll get an introduction to accounting, starting with the Income Statement
for a simple online business.
Table of Contents:

• 1:10: Motivation for the Financial Statements

• 4:13: Income Statement Overview
• 13:05: Recap and Summary

Quiz Questions:
13:04 How are Cost of Goods Sold (COGS) and Operating Expenses (OpEx) different?
a) OpEx is always significantly greater than COGS.
b) COGS is 100% variable, while OpEx is 100% fixed.
c) COGS corresponds to per-unit expenses, while OpEx is for expenses that can’t be
linked to individual units sold.
d) COGS does not exist for services-based companies.
Explanation: Operating Expenses may be greater than, less than, or the same as COGS, so the
first answer is incorrect. COGS is 100% variable, and OpEx is mostly fixed but may have some
variable components as well, so the second answer is wrong. And COGS does exist for services
companies, but it’s often called “Cost of Services” instead, so the last answer is incorrect. This
makes the third answer the best choice because it correctly describes the main difference.

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02-02: Accounts Receivable (8:56)
You’ll learn what happens when a customer places a larger order that we do NOT immediately
collect in cash in this lesson, and you’ll see how Accounts Receivable flows through and affects
the financial statements.
Table of Contents:

• 1:18: Explanation of Scenario

• 2:44: Excel Demonstration

Quiz Questions:
[No quiz questions.]

02-03: Accounts Payable and Accrued Expenses (10:40)

In this lesson, you’ll learn how Accounts Payable and Accrued Expenses work on the financial
statements, including how they affect a company’s cash flows when they increase and
decrease, and the real-world events they represent.
Table of Contents:

• 0:48: Explanation of Scenario

• 2:34: Excel Demonstration
• 8:03: Accrued Expenses

Quiz Questions:
8:02 When Accounts Payable increases by $20 (Step 1 of the process), what is the INTUITION
that explains why the company’s Cash balance increases by $5?
a) The new $20 expense on the Income Statement, which has not yet been paid in cash,
results in $5 of tax savings at a 25% tax rate.
b) This is incorrect – the Cash balance should not change because there is no cash payment
in Step 1 of this process.
c) Initially, the Cash balance decreases by $20, but then it increases by $25 because the
expense is non-cash, and the company saves $5 in taxes.
Explanation: The first answer choice is correct for the reasons stated. Recognizing an ordinary
business expense without paying it in cash creates tax savings for the company. The second

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answer is wrong because the tax savings does create a change in the Cash balance. The third
answer is wrong because the Cash balance does not initially decrease by $20 since the $20
expense has not yet been paid in cash.

02-04: Prepaid Expenses (8:00)

You’ll learn how Prepaid Expenses flow through the statements in the lesson, including what
happens when they increase due to an early cash payment of an expense, and when they
decrease as the expense is finally recognized on the Income Statement.
Table of Contents:

• 0:28 Explanation of Scenario

• 2:33 Excel Demonstration

Quiz Questions:
[No quiz questions.]

02-05: Deferred Revenue (8:34)

In this lesson, you’ll learn how changes to Deferred Revenue flow through the financial
statements, how companies typically use Deferred Revenue, and what to expect from it in real
life.
Table of Contents:

• 0:23: Explanation of Scenario

• 2:39: Excel Demonstration

Quiz Questions:
[No quiz questions.]

02-06: Inventory, COGS, and Physical Products (12:41)

You’ll learn how Inventory and Cost of Goods Sold (COGS) work when ordering materials for
physical products and then selling and delivering the products in this lesson; you’ll also get a

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few examples at the end that illustrate why we need the full financial statements instead of just
an Income Statement.
Table of Contents:

• 0:56: Explanation of Scenario

• 3:33: Excel Demonstration
• 8:09: Why Do We Need the Financial Statements?

Quiz Questions:
8:08 What happens on the Income Statement when a company orders $100 of Inventory?
a) It gets recorded as $100 in Cost of Goods Sold (COGS).
b) Nothing happens until the Inventory is turned into products, sold, and delivered to
customers.
c) It depends on whether the customers have preordered the products, or if they will pay
upon delivery.
d) None of the above.
Explanation: The second answer choice is correct. The first answer choice is false because we
do NOT record any COGS when Inventory is first ordered, but instead only when the
corresponding products are actually sold, due to the matching principle of accounting. Whether
or not the customers have paid in advance or are paying upon delivery has nothing to do with
the recognition of this expense, so the third answer choice is false.

02-07: Capital Expenditures (CapEx) and Depreciation (15:12)

In this lesson, you’ll learn how the financial statements change to reflect Capital Expenditures,
such as the purchase of equipment and indoor facilities, and how their after-effects show up on
the statements via the Depreciation line item.
Table of Contents:

• 0:56: Changes to the Model

• 2:36: Explanation of Scenario
• 5:15: Excel Demonstration
• 12:49: Summary and Other Notes

Quiz Questions:

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12:48 In the year FOLLOWING initial CapEx spending, how do Net Income and Cash Flow
change?
a) Net Income will increase, but Cash Flow will decrease.
b) Net Income will decrease, but Cash Flow will increase.
c) Net Income will decrease, and Cash Flow will decrease.
d) Net Income will increase, and Cash Flow will increase.
Explanation: The second answer choice is the best one. In the years following initial CapEx
spending, Net Income will decrease due to the continued allocation of the initial CapEx
spending to Depreciation. Therefore, the first and last answer choices are false. However, Cash
Flow will increase because you add back Depreciation as a non-cash expense, which reduces
taxes but doesn’t cost you anything in cash. And you don’t recognize any of the CapEx in the
year afterward, so Cash Flow always increases because of the Depreciation add-back.

02-08: Debt and Interest Expense (10:53)

You’ll learn how Debt Issuances and Repayments work in this lesson, as well as how companies
record the Interest Expense from Debt on their financial statements – and you’ll see how the
accounting treatment differs from the treatment of CapEx and Depreciation.
Table of Contents:

• 1:00: Explanation of Scenario

• 3:27: Excel Demonstration
• 9:12: Real-Life Notes and Summary

Quiz Questions:
9:11 Consider CapEx spending in Year 1 followed by Depreciation in Year 2, and then a Debt
Issuance in Year 1 and Interest Expense in Year 2. Why does the cash flow impact for each
sequence of events differ?
a) Because CapEx is a cash outflow, but a Debt Issuance is a cash inflow.
b) Because Depreciation is a non-cash expense, but Interest Expense is a cash expense.
c) Because Depreciation reduces Net PP&E, but Interest does not reduce the Debt balance.
d) All of the above.
Explanation: Everything above is true. With CapEx, Year 1 cash flow is lower, but Year 2 cash
flow is higher because CapEx is a cash outflow, and the resulting Depreciation is a tax-
deductible non-cash expense that reduces the company’s income taxes. On the other hand,

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with a Debt Issuance, the initial issuance is a cash inflow in Year 1, which boosts cash flow, and
then the resulting Interest Expense in Year 2 and beyond is a cash expense that costs the
company (despite also reducing its taxes). The third point is also true and relates to the Balance
Sheet presentation of these items; Net PP&E decreases over time due to Depreciation, which
represents the allocation of the asset’s initial price over its useful life.

02-09: Stock Issuances and Repurchases and Common Dividends (14:06)

In this lesson, you’ll learn how Common Stock Issuances flow through the statements, and how
“payments” to common shareholders, in the form of Dividends and Stock Repurchases, affect
everything.
Table of Contents:

• 1:23: Explanation of Scenario

• 2:25: Stock Issuances
• 6:06: Dividends and Repurchases
• 12:46: Recap and Summary

Quiz Questions:
12:45 Which of the following represents a DIFFERENCE between paying common
shareholders with a Dividend vs. a Stock Repurchase?
a) Dividends reduce the company’s Cash balance; Stock Repurchases do not.
b) Stock Repurchases reduce the common share count; Dividends do not.
c) Dividends reduce Common Shareholders’ Equity on the Balance Sheet; Stock
Repurchases do not.
d) None of the above (i.e., these statements are all wrong).
Explanation: The second answer choice is correct. Dividends are simply cash payments to
shareholders, so they do not affect the share count at all. But Stock Repurchases represent the
removal of outstanding shares, so they decrease the share count. Both these items reduce the
Cash balance, so the first answer is false, and both also reduce Common Shareholders’ Equity,
so the third answer is false as well.

02-10: Preferred Stock Issuances and Repayments and Preferred Dividends (10:54)

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You’ll learn how Preferred Stock Issuances and Repayments work on the financial statements in
this lesson, and you’ll see how Preferred Dividends are similar to and different from Interest
Expense.
Table of Contents:

• 1:28: Explanation of Scenario

• 3:42: Preferred Stock Issuances and Repayments
• 6:08: Preferred Dividends
• 9:06: Recap and Summary

Quiz Questions:
9:05 Which of the following represents a DIFFERENCE between Debt and Preferred Stock?
a) Preferred Dividends reduce Preferred Stock, but Interest Expense does not reduce Debt.
b) Preferred Dividends reduce Net Income to Common, but Interest Expense does not.
c) Interest on Debt is tax-deductible, but Preferred Dividends are not.
d) All of the above.
Explanation: The third answer choice is correct. Preferred Stock is a higher-cost form of Debt,
and the Preferred Dividends paid on it are not tax-deductible, unlike Interest; coupon rates also
tend to be higher than interest rates on Debt. Preferred Dividends reduce Common
Shareholders’ Equity, not Preferred Stock, so the first answer is wrong. Also, both Interest
Expense and Preferred Dividends reduce Net Income to Common. Interest Expense always
reduces Net Income, and since Net Income to Common is always less than or equal to Net
Income, Interest Expense must, therefore, also reduce Net Income to Common.

02-11: Finance Leases (Capital Leases) (U.S. GAAP and IFRS) (16:56)
In this lesson, you’ll learn how to record Finance Leases, formerly known as Capital Leases, on
the financial statements, and how companies record “Interest” and “Depreciation” on these
leases, even though they are paying a simple annual cash expense for them.
Table of Contents:

• 0:30: Explanation of Scenario and Lease Types

• 2:38: Finance Lease Math
• 9:40: Finance Leases on the Statements
• 14:29: Recap and Summary

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Quiz Questions:
9:39 A company signs a Finance Lease with an initial Lease Asset and Liability of $300, term of
10 years, annual rental payments of $40, and a Discount Rate of 5%. What are all the
associated expenses in Year 1?
a) Depreciation = $30; Interest Expense = $15; Principal Repayment = $25.
b) Depreciation = $30; Interest Expense = $15; Principal Repayment = $30.
c) Depreciation = $40; Interest Expense = $25; Principal Repayment = $15.
d) Depreciation = $30; Interest Expense = $25; Principal Repayment = $15.
Explanation: The first answer choice is correct. The Depreciation = $300 / 10 = $30, which
eliminates the third answer choice. Interest Expense = $300 * 5% = $15, which eliminates the
last two answer choices. The Lease Principal Repayment = Cash Lease Expense – Interest
Expense = $40 – $15 = $25, which make the first answer choice correct.

02-12: Operating Leases (Different Treatment Under U.S. GAAP) (15:52)

You’ll learn the full accounting treatment for Operating Leases under U.S. GAAP in this lesson
and see how it’s subtly different from the treatment for Operating Leases under IFRS and the
treatment for Finance Leases under both systems.
Table of Contents:

• 2:50: Operating Lease Math (U.S. GAAP)

• 8:10: Operating Leases on the Statements (U.S. GAAP)
• 13:15: Recap and Summary

Quiz Questions:
8:10 Under U.S. GAAP, how are Operating Leases different from Finance Leases on the
financial statements?
a) Finance Leases go on the Balance Sheet, but Operating Leases do not.
b) Companies record a simple Rental Expense for Operating Leases, but Interest and
Depreciation for Finance Leases.
c) Operating Leases are generally cheaper over the entire lease term than Finance Leases.
d) All of the above.

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Explanation: The second statement is correct, as this explains the main difference in the
treatment. As of 2019, both lease types are shown on-Balance Sheet, so the first answer is
wrong. The third answer is wrong because the total cost over the lease term tends to be about
the same for both types.

02-13: Financial Investments and Interest Income (9:30)

In this lesson, you’ll learn how the purchases and sales of financial investments and the
resulting interest income from these investments affect the financial statements.
Table of Contents:

• 1:38: Explanation of Scenario

• 3:03: Financial Investments and Interest Income Walkthrough

Quiz Questions:
[No quiz questions.]

02-14: Book Taxes, Cash Taxes, and Deferred Taxes (16:00)

You’ll learn the difference between Book Taxes and Cash Taxes in this lesson, and how items
such as accelerated Depreciation for tax purposes result in Deferred Income Taxes on the
financial statements – including full walk-throughs.
Table of Contents:

• 0:53: Scenario Explanation

• 3:14: Accelerated Depreciation Walkthrough
• 9:29: Tax Schedule in the Model
• 14:33: Recap and Summary

Quiz Questions:
9:28 What happens to a company’s Deferred Tax Liability when Tax Depreciation exceeds
Book Depreciation in one year?
a) The DTL increases.
b) The DTL decreases.
c) It depends on the Tax vs. Book Depreciation pattern in previous years.

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 d) The DTL stays the same.
Explanation: The first answer choice is correct. When Tax Depreciation > Book Depreciation,
Tax Pre-Tax Income is lower than Book Pre-Tax Income, which means Cash Taxes are less than
Book Taxes. As a result, the company gets a near-term tax benefit in the current period but
must pay extra taxes later on when the differences reverse, and Book Depreciation exceeds Tax
Depreciation. The DTL increases to reflect this future obligation to higher taxes. It has nothing
to do with the Depreciation differences in previous years because the DTL changes based on
what happens only in the current year.

02-15: Net Operating Losses (NOLs) and Deferred Tax Assets (DTAs) (16:07)
In this lesson, you’ll learn how companies accumulate Net Operating Losses (NOLs) and use
them up to offset taxable income, and you’ll see how they work with Deferred Income Taxes
and Deferred Tax Assets (DTAs) on the financial statements.
Table of Contents:

• 0:59: Scenario Explanation

• 2:14: Simple NOL Walkthrough
• 9:36: NOLs in the 3-Statement Model
• 14:32: Recap and Summary

Quiz Questions:
9:35 How does the Deferred Tax Asset (DTA) change when a company with a 25% tax rate
records a Pre-Tax Loss of $100 in the first year of its operations?
a) The DTA increases by $100.
b) The DTA decreases by $100.
c) The DTA increases by $75.
d) The DTA decreases by $75.
e) The DTA increases by $25.
f) The DTA decreases by $25.
Explanation: The fifth answer choice is correct. If a company has a Pre-Tax Loss of $100, that
loss will result in $100 of additional NOLs. On the Balance Sheet, the full amount of NOLs are
not shown; instead, Tax Rate * NOLs is the approximate amount shown within the DTA.
Therefore, the DTA will increase by 25% * $100 = $25 in this case.

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02-16: Gains and Losses on Asset Sales (12:20)
You’ll learn how to reflect Gains and Losses on Asset sales in this lesson, and you’ll learn the
intuition behind the placement of the required adjustments on the financial statements.
Table of Contents:

• 1:50: Scenario Explanation and Simple Asset Sale

• 4:20: Gain/Loss Walkthrough and Intuition
• 10:38: Recap and Summary

Quiz Questions:
10:37 When there’s a PP&E Sale, why do you need to include both the book value of assets
sold and the Gain or Loss within PP&E Sale Proceeds on the CFS in Cash Flow from Investing?
a) Because you’re “re-classifying” the Gain or Loss out of CFO and into CFI instead.
b) Because if you do not do this, the Net PP&E on the Balance Sheet will not change by the
correct amount.
c) Because the CFI section needs to reflect the total proceeds received from all asset sales.
d) All of the above.
Explanation: Everything above is true. These are all intuitive methods that you can use to think
about the treatment of the PP&E Sale Proceeds line item on the Cash Flow Statement, and why
it must include both the book value of assets sold and Gains and Losses on the disposed assets.
Net PP&E on the Balance Sheet must always change by the book value of assets sold, which
means that the after-tax Gains and Losses show up in Cash – and that happens only if you
follow this treatment.

02-17: Asset Impairments and Write-Downs (13:12)

In this lesson, you’ll learn how to record asset impairments and write-downs on the financial
statements – both a quick, simplified version and a more complex version that reflects the
proper Cash Tax treatment.
Table of Contents:

• 1:26: Scenario Explanation

• 3:47: Write-Down with Simplified Tax Treatment
• 7:48: Complex Tax Treatment for Write-Downs
• 11:00: Recap and Summary

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Quiz Questions:
[No quiz questions.]

02-18: Stock-Based Compensation (11:33)

You’ll learn the simplified treatment for Stock-Based Compensation on the financial statements,
as well as the correct treatment, in this lesson, and you’ll understand why companies may
choose to pay employees in stock.
Table of Contents:

• 1:14: Scenario Explanation

• 3:48: SBC with Simplified Tax Treatment
• 7:07: Correct Tax Treatment for SBC
• 10:04: Recap and Summary

Quiz Questions:
10:03 If you use the proper tax treatment, why does an initial issuance of Stock-Based
Compensation (SBC) create a Deferred Tax Asset?
a) Because the company can only deduct SBC for Cash-Tax purposes when employees
exercise their awards and sell stock in the future.
b) Because non-cash expenses such as SBC are never deductible for Cash-Tax purposes.
c) Because the company must pay Taxes on the SBC when it is first issued, even though
employees have not exercised their awards yet.
d) All of the above.
Explanation: The first answer choice is correct. Since the SBC is only Cash-Tax Deductible when
employees sell their shares, it does not save the company any Cash Taxes upfront. Therefore,
the “benefits” are deferred to a future period, which means that a DTA is created. The second
answer is false because non-cash expenses such as Depreciation are deductible for Cash-Tax
purposes. And the third answer is false because the company isn’t “paying taxes” on the SBC –
the point is that the SBC is *not* Cash-Tax Deductible when it is first issued.

02-19: Goodwill and Other Intangible Assets from Mergers & Acquisitions (M&A) (23:07)

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In this lesson, you’ll get an introduction to accounting for M&A deals, including how to combine
the Balance Sheets of an acquirer and target, why Goodwill and Other Intangible Assets get
created, and how to reflect acquisitions in a 3-statement model.
Table of Contents:

• 1:36: Overview
• 3:44: Balance Sheet Combination
• 6:36: Goodwill and Other Intangibles
• 10:32: 3-Statement Model Changes
• 13:34: Amortization of Intangibles
• 17:03: The Correct Tax Treatment
• 21:13: Recap and Summary

Quiz Questions:
10:31 Why do you almost always need to create Goodwill when one company acquires
another?
a) Because the Balance Sheet is guaranteed to go out of balance following any acquisition.
b) Because the buyer almost always pays a premium to the seller’s Common
Shareholders’ Equity.
c) It’s only necessary if the seller has a Balance Sheet, but no Income Statement or Cash
Flow Statement.
d) None of the above.
Explanation: The second answer choice is the best one because the premium paid by the buyer
is why the Balance Sheet may go out of balance. If the buyer pays $200 in Cash, but the seller’s
Common Shareholders’ Equity is only $150, the Assets side goes down by $200, while the L&E
side only decreases by $150, which makes the side go out of balance. To fix this problem, you
must create new Assets, such as Goodwill and Other Intangibles. The first answer is not true,
technically, because the buyer could pay exactly the seller’s Common Shareholders’ Equity. The
third answer choice is false because Goodwill may be created regardless of the size or
complexity of the acquired company.

02-20: U.S. GAAP vs. IFRS on the Financial Statements (17:54)

You’ll learn about the key differences between IFRS and U.S. GAAP in this lesson, and you’ll see
an example of how to “convert” a Cash Flow Statement from an IFRS-based company into a
more usable format.

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Table of Contents:

• 1:23: Summary of the Differences

• 3:07: Non-Standard Cash Flow Statements
• 6:58: How to Convert an IFRS CFS
• 16:12: Recap and Summary

Quiz Questions:
16:11 How do the financial statements differ under U.S. GAAP vs. IFRS?
a) IFRS-based companies often use the Direct Method for the Cash Flow Statement rather
than the Indirect Method.
b) IFRS-based companies often place items in more “random” locations on the Cash Flow
Statement.
c) Under IFRS, the Operating Lease Expense is split into Interest and Depreciation
elements.
d) All of the above.
Explanation: Everything above is true. These all represent some of the key differences between
U.S. GAAP and IFRS on the financial statements; the CFS is the most different statement, and
the IS and BS are largely the same, even if some of the names differ a bit.

02-21: Summary of the Income Statement, Balance Sheet, and Cash Flow Statement (19:42)
In this lesson, you’ll get a summary of the three financial statements, you’ll learn what “Asset”
and “Liability” mean, and you’ll learn some rules of thumb you can use to match items on the
Balance Sheet to those on the Cash Flow Statement.
Table of Contents:

• 0:47: Income Statement Summary

• 4:43: Balance Sheet Summary
• 12:23: Cash Flow Statement Summary
• 17:31: Recap and Summary

Quiz Questions:
12:23 Why is Deferred Revenue considered a Liability?

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 a) Because the company has already collected the Cash from the sale – so there is no
future benefit.
b) Because the company now has an obligation to deliver the product or service.
c) Because the company will spend money to deliver the product or service.
d) All of the above.
Explanation: Everything above is true. If an item is a Liability, it means that the company has
some future obligation as a result of the item, such as a cash payment or the requirement to
deliver a product or service. Even if the item provided some benefit to the company in the past,
if it has a *future* obligation, it’s still considered a Liability.

02-22: Linking and Projecting the Financial Statements (30:25)

You’ll learn how to project and link the financial statements for Target in this lesson, including
some of the work that you should do upfront to simplify and consolidate the statements to
make financial modeling much easier.
Table of Contents:

• 2:08: Simplifying and Consolidating the Statements

• 9:27: Projecting the Statements
• 21:48: Linking the Statements
• 27:48: Recap and Summary

Quiz Questions:
9:26 Which of the following is a sign that you have NOT consolidated the financial statements
correctly before projecting them?
a) The Balance Sheet has a Deferred Tax Asset and a Deferred Tax Liability.
b) The Cash Flow Statement has 10 line items in between Net Income and the Change in
Working Capital.
c) The Balance Sheet has 12 items on the Assets side and 16 items on the L&E side.
d) All of the above.
Explanation: Everything above is a sign that you haven’t simplified and consolidated the
statements properly. There should be only one “Deferred Tax” line item on the Balance Sheet,
only a few items in between Net Income and the Change in Working Capital on the Cash Flow
Statement, and only 5-10 items on each side of the Balance Sheet.

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02-23: Working Capital and the Change in Working Capital (22:57)
In this lesson, you’ll learn what Working Capital and the Change in Working Capital mean, and
you’ll see how they compare for Target, Best Buy, and Zendesk.
Table of Contents:

• 4:06: What is Working Capital?

• 8:40: The Change in Working Capital
• 14:32: Best Buy vs. Zendesk Comparison
• 20:03: Recap and Summary

Quiz Questions:
14:31 What does it mean if a company’s Working Capital is persistently negative, but its
Change in Working Capital is persistently positive?
a) This scenario is a contradiction and cannot happen in real life.
b) The company’s cash payment/collection policies boost its Cash Flow, likely due to
delayed payments to suppliers or high upfront cash collection.
c) The company is in trouble because its Current Operating Assets cannot cover the cash
outflows from its Current Operating Liabilities.
d) None of the above.
Explanation: The second answer choice is correct. If Working Capital is negative, but the
Change in WC is positive, Current Operating Liabilities exceed Current Operating Assets, and the
Liabilities keep increasing by more than the Assets. That could be because the company collects
significant cash before product/service delivery, boosting Deferred Revenue, or it could be
because it collects Receivables from customers and sells Inventory before paying its suppliers,
resulting in high and growing Accounts Payable/Accrued Expense balances. The first answer is
wrong because this scenario happens all the time, and the third answer is also wrong because it
depends on the specific components of Working Capital that explain this situation.

02-24: Free Cash Flow: What It Means and How to Use It (16:37)
You’ll learn what “Free Cash Flow” means in this lesson, why it matters, and how to interpret
the historical Free Cash Flow numbers for Target, Best Buy, and Zendesk.
Table of Contents:

• 5:16: What Does Free Cash Flow Mean?

• 9:05: FCF for Best Buy vs. Zendesk

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 • 14:25: Recap and Summary

Quiz Questions:
14:24 Why might we still be skeptical of Zendesk’s FCF, even though it’s positive and growing
and greatly exceeds its Net Income?
a) Because the company seems to be sharply reducing its CapEx to produce those results.
b) Because the company’s Change in Working Capital is also fluctuating significantly.
c) Because the company’s FCF is positive mostly because of its huge Stock-Based
Compensation.
d) All of the above.
Explanation: The third answer choice is correct. Zendesk does not appear to be manipulating its
CapEx or Change in Working Capital too much, as both are reasonable percentages of Cash Flow
from Operations. However, its Stock-Based Compensation add-back is huge, which is the main
reason why its Cash Flow from Operations is positive, while its Net Income is negative. This
practice is common among tech companies, but it’s still a potential red flag because it means
the company’s Equity keeps getting diluted.

02-25: Key Metrics and Ratios: EBIT, EBITDA, Leverage Ratio, Interest Coverage Ratio, ROA,
ROE, ROIC, DSO, DIO, and DPO (20:41)
In this lesson, you’ll learn about key financial metrics and ratios, such as EBIT, EBITDA, Debt /
EBITDA, EBITDA / Interest, ROA, ROE, ROIC, and Days Sales Outstanding, Days Inventory
Outstanding, and Days Payable Outstanding. You’ll use these metrics to compare Best Buy and
Target and see which one has the better financial performance.
Table of Contents:

• 2:13: "Cash Flow Proxy" Metrics

• 6:04: Credit Metrics
• 7:30: Returns-Based Metrics
• 12:23: Cash Conversion Metrics
• 15:12: Best Buy vs. Target
• 18:41: Recap and Summary

Quiz Questions:

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12:22 Why is it not necessarily a negative sign if a company’s ROE has been decreasing as it
grows its revenue?
a) The company’s capital structure might be changing at the same time.
b) ROE is not that relevant for companies with little Equity in their capital structures.
c) An ROE decrease only matters if the company’s Net Income is also decreasing at the
same time.
d) All of the above.
Explanation: The first answer is correct. ROE is useful when a company’s Debt and Equity
percentages (relative to Total Capital) stay in similar ranges; if they change significantly, ROE
will fluctuate because the company might be issuing more Stock, repaying Debt, repurchasing
Stock, or otherwise changing the denominators of the Returns-based metrics. ROE is still
relevant even if the company uses little Equity; it’s arguably even more relevant in that case
because investors want to see that it’s being used efficiently. And an ROE decrease matters
even if Net Income is increasing because if that’s the case, Equity may be increasing by an even
greater percentage than Net Income, which can be problematic.

02-26: Interview Questions: Working Capital Line Items (21:18)

You’ll get practice answering interview questions about Working Capital line items, such as
Accounts Receivable and Inventory, in this lesson, and you’ll use a modified version of the 3-
statement model to check your answers.
Table of Contents:

• 2:54: Interview Question Guidelines

• 3:46: Accounts Receivable
• 7:14: Prepaid Expenses
• 10:14: Inventory and Products Sold
• 13:29: Accounts Payable
• 16:58: Deferred Revenue
• 19:52: Recap and Summary

Quiz Questions:
[No quiz questions.]

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02-27: Interview Questions: Depreciation, Stock-Based Compensation, and PP&E Write-
Downs (11:22)
In this lesson, you’ll learn how to answer interview questions about changes to items such as
Depreciation, Stock-Based Compensation, and PP&E Write-Downs (non-cash expenses).
Table of Contents:

• 0:58: Guidelines for Non-Cash Expenses

• 2:44: Depreciation
• 4:50: Stock-Based Compensation
• 7:28: PP&E Write-Down
• 10:16: Recap and Summary

Quiz Questions:
[No quiz questions.]

02-28: Interview Questions: Operating Leases and Finance Leases (11:28)

You’ll learn how to answer interview questions and walk through the financial statements to
describe changes in Operating Leases and Finance Leases in this lesson.
Table of Contents:

• 0:33: Guidelines for Lease Questions

• 3:08: Operating Leases (U.S. GAAP)
• 6:56: Finance Leases
• 10:35: Conclusion

Quiz Questions:
[No quiz questions.]

02-29: Interview Questions: Inventory Purchased on Credit to Products Sold (8:49)

In this tutorial, you’ll learn how Inventory purchased on credit and eventually turned into
finished, delivered products differs from a simple change when Inventory is purchased with
cash.

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Table of Contents:

• 0:44: Guidelines for Multistep Accounting Questions

• 4:31: Step 1: Purchasing Inventory on Credit
• 6:05: Step 2: Selling Products and Recording Revenue

Quiz Questions:
[No quiz questions.]

02-30: Interview Questions: Buying Factories with Debt and Selling them for a Gain (10:18)
You’ll learn how to walk through a complex scenario in this lesson in which a company buys
factories using Debt, operates them for a year, and then sells the factories for a Gain at the end
of the year.
Table of Contents:

• 2:15: Step 1: Initial Purchase

• 3:28: Step 2: Full Year of Interest, Depreciation, and Debt Principal Repayment
• 6:02: Step 3: Factory Sale

Quiz Questions:
[No quiz questions.]

02-31: Interview Questions: Debt-Funded Stock Buybacks (7:54)

In this lesson, you’ll learn how to walk through a debt-funded stock repurchase and explain
what happens on the financial statements after a year has passed.
Table of Contents:

• 1:23: Initial Stock Repurchase

• 3:30: Interest Expense Over One Year
• 6:55: Recap and Summary

Quiz Questions:

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[No quiz questions.]

02-32: Interview Questions: Acquiring a Company, Combining Its Statements, and Writing
Down Goodwill (9:57)
You’ll learn how to walk through the acquisition of another company on the financial
statements in this lesson, including the initial impact, the consolidation of the financial
statements, and the eventual write-down or impairment of Goodwill.
Table of Contents:

• 1:30: Initial Acquisition

• 3:42: Year of Consolidated Statements
• 7:02: Goodwill Write-Down
• 9:15: Recap and Summary

Quiz Questions:
[No quiz questions.]

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