Financial Statements & Normalization

Question 1

What are the three core financial statements used in business valuation?

Answer 1

Income Statement, Balance Sheet, and Statement of Cash Flows.

Question 2

What does the income statement show?

Answer 2

Revenues, expenses, and net income over a period of time.

Question 3

What does the balance sheet show?

Answer 3

Assets, liabilities, and equity at a specific point in time.

Question 4

What does the statement of cash flows show?

Answer 4

Cash inflows and outflows from operating, investing, and financing activities.

Question 5

What are common components of an income statement?

Answer 5

Sales, cost of goods sold, gross profit, SG&A, interest, taxes, net income.

Question 6

What are the three sections of a cash flow statement?

Answer 6

Operating activities, Investing activities, and Financing activities.

Question 7

What are current assets?

Answer 7

Assets expected to be converted to cash within a year (e.g., cash, receivables, inventory).

Question 8

What are current liabilities?

Answer 8

Obligations due within a year (e.g., accounts payable, short-term debt).

Question 9

What is depreciation?

Answer 9

The systematic reduction of the recorded cost of a tangible fixed asset over time.

Question 10

What is amortization?

Answer 10

The systematic reduction of the recorded cost of an intangible asset over time.

Question 11

What is normalization in business valuation?

Answer 11

Adjusting financial statements to remove non-recurring, discretionary, or non-operating items.

Question 12

Why do appraisers normalize financials?

Answer 12

To reflect the true economic earning capacity of the business.

Question 13

Give an example of a normalization adjustment.

Answer 13

Adjusting owner’s salary to market rate or removing personal vehicle expenses.

Question 14

What is the difference between accrual and cash accounting?

Answer 14

Accrual records revenues/expenses when earned/incurred; cash records them when received/paid.

Question 15

What is the ‘modified cash basis’ of accounting?

Answer 15

A hybrid method combining elements of cash and accrual accounting.

Question 16

What is the order of reliability for financial statement types?

Answer 16

Audited > Reviewed > Compiled > Tax Returns > Internally Prepared > Shoebox.

Question 17

What are examples of intangible assets?

Answer 17

Goodwill, trademarks, patents, copyrights, covenants not to compete.