- In order to understand financial statements, four main concepts are required: income statement, equity statement, balance sheet and most importantly the cash flow statement.
- NPV calculations and many other calculations can be accomplished with the help of financial statements.
- Net income is not used in NPV analysis
- To get the actual cash flows, you need to undo the accruals with the help of reverse engineering.
- The most important long term accrual that affects calculations is depreciation.
- The difference in the GAAP and IRS schedule is reflected in the form of deferred taxes.
- The most important short term accrual is known as change in working capital.
- Cash flow statements, if available, can help handle most difficulties in accrual calculations.
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