Josh Aharonoff
Apr 13, 2023
Welcome to this weeks edition of Legit Numbers - it’s great to have you here!
Yes, you read that right! I've decided to change the official name for this digest, and from here on, it will be called Legit Numbers.
What we’ll be covering in this edition:
14 Financial Ratios & Metrics (with definitions & formulas)
Free course on Financial Statements
10 Finance & Accounting interview questions (from easy to difficult)
20 types of Liabilities
An entire college Finance & Accounting 101 course fits in one excel file
OK, let’s begin!
14 Financial Ratios & Metrics (with definitions & formulas)
1️⃣ Debt-to-Equity
Definition: A company's total debt to its total shareholder equity
Formula: Total debt / Total equity
2️⃣ Gross Margin
Definition: A company's Gross Profit displayed as a % of its Revenue
Formula: Gross Profit / Revenue
3️⃣ Operating Margin
Definition: The percentage of a company's revenue that is left over after deducting its operating expenses
Formula: Net Operating income / Revenue
4️⃣ Return on Equity (ROE)
Definition: How much of a return you are getting on your equity
Formula: Net Income / Owners Equity
5️⃣ Return on Assets (ROA)
Definition: Showcases a company's profitability by comparing its net income to its total assets
Formula: Net Income / Total Assets
6️⃣ Inventory Turnover
Definition: How efficiently a company uses its inventory by measuring the number of times inventory is sold and then replaced within a given time period
Formula: cost of goods sold / average inventory
7️⃣ Accounts Receivable Turnover
Definition: A company's efficiency in collecting its credit sales
Formula: Net Credit Sales / Average Accounts Receivable
8️⃣ Days Sales Outstanding (DSO)
Definition: How long it takes a company to collect payments from its customers
Formula: (Accounts Receivable / Total Credit Sales) x Number of Days
9️⃣ EBITDA
Definition: Short for Earnings Before Interest, Taxes, Depreciation, and Amortization, and is used in accounting to measure a company's profitability, and approximation for free cash flows
Formula: Net Income + Interest Expense - Interest Income + Taxes + Depreciation + Amortization
🔟 EBIT
Definition: Short for Earnings Before Interest and Taxes, and one of many metrics is used in to measure a company's profitability
Formula: Net Income + Interest Expense - Interest Income + Taxes
1️⃣1️⃣ Interest Coverage
Definition: A company's ability to pay the interest on its debt
Formula: Earnings Before Interest and Taxes (EBIT) / Interest Expense
1️⃣2️⃣ Asset Turnover
Definition: A company's efficiency in using its assets to generate revenue
Formula: Net Sales / Total Assets
1️⃣3️⃣ Days Payable Outstanding (DPO)
Definition: The average number of days that a company takes to pay its accounts payable
Formula: (Accounts Payable / Cost of Goods Sold) x Number of Days in Accounting Period
1️⃣4️⃣ Return on Ad Spend (ROAS)
Definition: Used in digital marketing to measure the effectiveness of advertising campaigns
Formula: Revenue from Advertising / Cost of Advertising
If you understand Financial Statements, you are ahead of 90%+ of the population
I’ve collected this list of 25 pieces of content from the top creators on linkedin and compiled them in a course for you
1 The 3 financial statements https://lnkd.in/ecqanjSx
2 The Profit & Loss https://lnkd.in/eDspfRQX
3 The Balance Sheet https://lnkd.in/eFDAMQnQ
4 The Statement of Cash Flows https://lnkd.in/eK4cs8qz
5 The Chart of Accounts https://lnkd.in/e-Hp9HEv
6 The difference between a P&L and a balance sheet https://lnkd.in/e5csDcrM
7 Difference between Gross Profit, Net Income, ETBIDA, and Cash Flows https://lnkd.in/e22Pid_i
8 Analyze a business with just a balance sheet https://lnkd.in/ev4vkssq
9 A guide to the financial statements https://lnkd.in/ecDVjABa
10 Understand a Balance sheet in 24 seconds https://lnkd.in/eTmGV8qB
11 Understand Financial Statements in less than 2 minutes https://lnkd.in/etWuZ-Xi
12 Cash vs Accrual https://lnkd.in/ePfkkTXq
13 Build a Profit & loss https://lnkd.in/eVeiwxAD
14 The sections of the balance sheet (with examples) https://lnkd.in/eBm7xGsq
15 Understand all 3 statements https://lnkd.in/eUw5cj8z
16 Financial statements 101 https://lnkd.in/e2ZbRuWu
17 How the Financial Statements Talk to Each Other https://lnkd.in/ei5kRG-X
18 Financial Analysis Scorecard https://lnkd.in/eNpF9u2T
19 Financial Analysis https://lnkd.in/e4UwDDT5
20 COGS vs Opex https://lnkd.in/e8muSfVd
21 Accounts Receivable https://lnkd.in/eVtxh735
22 Gross Profit & Gross Margin https://lnkd.in/er6sX2WW
23 Retained Earnings https://lnkd.in/ec6Ur8ei
24 Startup Profit & loss https://lnkd.in/ekfg6eQQ
25 Deferred Revenue https://lnkd.in/egj2Fqm8
10 Finance & Accounting interview questions (from easy to difficult)
1️⃣ What are the 3 financial statements, and how are they connected?
The 3 financial statements are the Profit and Loss, the Balance Sheet, and the Statement of Cash Flows.
The P&L connects to the Balance sheet via an account called Retained Earnings
And the Cash flows pulls balances from both the P&L and Balance Sheet
2️⃣ What’s the difference between Cash vs Accrual accounting?
Cash accounting for the most part means you classify money in as income, and money out as expenses
Accrual accounting means you classify income only when it’s earned, and expenses only when they are incurred
3️⃣ What is Deferred Revenue?
Deferred Revenue represents the $$ amount of goods or services you owe to your customers
4️⃣ How do journal entries work?
Journal entries help communicate which accounts on your general ledger are increasing or decreasing.
They are denoted via Debits and Credits, and must always match one another
5️⃣ What’s a bank reconciliation, and why is it important?
Bank reconciliations allow you to compare & match the balance in your bank accounts to the amounts reported in your General Ledger
These are crucial as with cash balances, there can be no room for interpretation
6️⃣ What is a accrued expense?
An accrued expense is an expense incurred, but not yet paid
It can also represent an expense incurred in which a bill has not been received, resulting in an estimate
7️⃣ What are workpapers, and how should you organize them?
Workpapers showcase the supporting calculations for entries recorded in your general ledger, often times prepared in excel.
It’s important for these to not only be accurate, but also easy for someone else to read & understand
8️⃣ What are the chart of accounts, and how should they look?
Your chart of accounts represent the line items that show up on your P&L and Balance Sheet
It's important to design these accounts in a manner in which readers can understand what’s happening easily
9️⃣ What’s a contra account and how does it work?
A contra account is an account in a section that behaves in the opposite manner of the accounts in that section.
An example can be a discount (contra revenue), and accumulated depreciation (contra asset)
🔟 How do you build a statement of cash flows?
You can easily build a statement of cash flows via the indirect method by taking the net ▲ in your balance sheet, as well as your net income
It is most commonly presented via your Cash from Operating Activities, Cash from Investing Activities, and Cash from Financing activities
Those are my 10 favorite Finance & Accounting interview questions…
20 types of Liabilities
Liabilities are obligations or debts to creditors - that can be vendors, customers, the government…anyone
1️⃣Accounts payable: money owed to suppliers or vendors
2️⃣ Deferred revenue: products / services owed to customers who have paid / owe you money
3️⃣ Accrued expenses: expenses that have been incurred but not yet paid (or a bill hasn’t been received)
4️⃣ Notes payable: promissory notes that represent a promise to repay a loan at a future date with interest
5️⃣ Deferred income taxes: taxes that will be due in future years as a result of temporary differences between book and tax
6️⃣ Loans payable: funds borrowed, often to be repaid with interest
7️⃣ Capital lease obligations: long-term lease contracts
8️⃣ Bonds payable: long-term debt securities issued by the company
9️⃣ Accrued interest: interest owed to lenders or bondholders
🔟 Convertible debt: debt securities that can be converted into equity at a later date / upon a specific event
1️⃣1️⃣ Contingent liabilities: potential liabilities that may arise in the future, such as legal claims or warranties.
1️⃣2️⃣ Gift cards and certificates: the amount of funds received from customers for gift cards or certificates that have not yet been redeemed
1️⃣3️⃣ Accrued bonuses: bonuses that have been earned by employees but not yet paid out
1️⃣4️⃣ Customer deposits: funds received from customers for future products or services that have not yet been delivered
1️⃣5️⃣ Deferred Rent: rent that has been paid in advance but not yet earned by a landlord or property owner
1️⃣6️⃣ Customer returns & allowances: the estimated amount of refunds or credits owed to customers for returned products or service adjustments.
1️⃣7️⃣ Dividends payable: the amount of dividends that have been declared but not yet paid to shareholders.
1️⃣8️⃣ Deferred compensation: amounts earned by employees but not yet paid out, such as stock options or bonuses.
1️⃣9️⃣ Warranty reserves: the estimated amount of costs that a company may incur in the future to fulfill warranty obligations.
2️⃣0️⃣ Sales tax payable: the amount of sales tax collected from customers but not yet remitted to government authorities.
But you don’t have to pay college tuition fees to get it
Today…I’m giving it to you for free
Here’s what’s included:
1️⃣ The Fundamentals
Here you’ll learn about
➡️ The Accounting Equation
Assets = Liabilities + Owners Equity.
This is the most important equation to understand
It means that everything of economic value that the business owns / substantially controls (ASSETS)
Was funded by amounts owed to creditors (LIABILITIES)
and amounts owed to owners (OWNERS EQUITY)
➡️ Cash vs Accrual Accounting
The cash basis of accounting mostly means that all money you receive is classified as income…
and all payments made are classified as expenses (with a few exceptions)
Accrual basis of accounting means that you only recognize revenue once it’s EARNED (IE you delivered your product / service)…
and that you only recognize expenses once they are INCURRED (IE you utilized the benefit)
➡️ Debits & Credits
This helps communicate what accounts on your financial statement are INCREASING and DECREASING
But because the financial statements are connected, you can’t just use one to communicate increasing, and the other for decreasing
So instead, there’s a system…and it’s pretty simple to remember
Assets go up with debits, down with credits
So liabilities + owners equity have the reverse…since they equal assets (go up with credits down with debits)
and for your P&L…well that all gets pushed into your retained earnings, which is an equity account
so all income accounts go up with credits, and down with debits
and vice versa for expenses
simple enough?
➡️ Reporting Standards
3 reporting standards
GAAP - generally accepted accounting principles, most commonly used
IFRS - International Financial Reporting System, used for comparing reporting internationally
Tax - what you use to file your taxes, which varies based off of jurisdictions
➡️ An overview of the Financial Statements
➡️ How the Financial Statements are connected
2️⃣ An in depth view on each financial statement
Here you’ll see mock set of financial statements with explanations on what each line item means. It includes
➡️ The Profit & Loss
➡️ The Balance Sheet
➡️ The Statement of Cash Flows
3️⃣ Key Ratios & KPIs
Here you’ll learn about key ratios to analyze financial activities
and KPIs that are commonly used with financial reporting
I hope that the information in this template gives you the ROI that it gave me
Click the image below to be taken to the Excel file with all the template links
And that’s a wrap!
If you enjoyed this newsletter, I’d love to have you fill out a quick 30 second testimonial over here! And if you have any suggestions on more topics you’d like to see, I’d love for you to respond and let me know
Till next week!