Financial Statement Modeling Wall Street Prep

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The3-Statement Model is an integrated model used to forecast the income statement, balance sheet, and cash flow statement of a company for purposes of projecting its forward-looking financial performance.

A well-built 3-statement financial model helps insiders (corporate development professionals, FP&A professionals) and outsiders (institutional investors, sell side equity research, investment bankers and private equity) see how the various activities of a firm work together, making it easier to see how decisions impact the overall performance of a business.

Data is much harder to find for private companies than for public companies, and reporting requirements vary across countries. We have compiled a guide on gathering historical data needed for financial modeling here.

In large part, the balance sheet is driven by the operating assumptions we make on the income statement. Revenues drive the operating assumptions in the income statement, and this continues to hold true in the balance sheet: Revenue and operating forecasts drive working capital items, capital expenditures, and a variety of other items. Think of the income statement as the horse and the balance sheet as the carriage. The income statement assumptions are driving the balance sheet forecasts.

Every individual line item on the cash flow statement should be referenced from elsewhere in the model (it should not be hardcoded) as it is a reconciliation. Constructing the cash flow statement correctly is critical to getting the balance sheet to balance.

For public companies, projecting earnings per share is key. Forecasting the numerator of EPS is described in detail in our income statement forecasting guide, but forecasting shares outstanding can be done in a variety of ways, ranging from simply keeping the historical share count constant to a more sophisticated analysis that takes into account forecasts for share repurchases and issuances. Click here for a guide to forecasting EPS.

Financial models are usually projected in nominal terms, so not controlling for the loss of purchasing power through monetary inflation. You would capture inflation through projecting rising costs and (hopefully) rising prices in the sale of goods.

University of Mississippi students majoring in banking and finance and related fields were able to learn from professionals and sharpen their skills at a Wall Street Preparation workshop hosted Feb. 1-2 by the School of Business Administration.

The workshop allowed students to better understand financial aspects within financial statement modeling, but also to improve their skills in the Excel software platform, which is regularly used in many components of the financial industry.

Fry encouraged students to take advantage of their resources at Ole Miss and hone the analytical and quantitative skills that are critical in finance. He also gave advice on how students could stand out as they seek internships and networking opportunities in this competitive field.

Typically, the main balance sheet section of a model will either have its own dedicated worksheet or it will be part of a larger worksheet containing other financial statements and schedules. Before we dive into individual line items, here are some balance sheet best practices.

Unlike working capital, PP&E and intangible assets are depreciated or amortized (with a few notable exceptions like land and goodwill). This creates a layer of complexity in the forecasting, as illustrated below:

Conceptually, a share buyback is essentially a dividend to remaining shareholders paid in the form of additional ownership of the company. In our example, the $100 million that the company wants to return to shareholders can actually be achieved one of two ways: via a cash dividend or equivalently via a $100m buyback. The per share increase to each shareholder (all else equal) should amount to exactly $100 million in aggregate value. One benefit with the share repurchase approach is that unlike a cash dividend, tax can usually be deferred paid by shareholders on the buyback.

From a modeling perspective, barring some management guidance or thesis on future buybacks, if a company has engaged in recurring buybacks historically (the amount of buybacks can be found on the historical cash flow statement), straight-lining the amount into the forecast period is usually reasonable.

Retained earnings is the link between the balance sheet and the income statement. In a 3-statement model, the net income will be referenced from the income statement. Meanwhile, barring a specific thesis on dividends, dividends will be forecast as a percentage of net income based on historical trends (keep the historical dividend payout ratio constant).

And in a separate schedule in the 10K you can see a full breakout of $1,427m in year-over-year changes in OCI (much like the income statement is a breakout of the year over year changes in retained earnings):

Forecasting OCI is fairly straightforward. Because the gains and losses that flow into this line item are difficult to predict, the safest bet is to assume no change year-over-year going forward (in other words, straight-line the last historical OCI balance on the balance sheet):

When checking to make certain all items on the cash flow statement are linked to the correct balance sheet items, to what item on the balance sheet should stock based compensation be linked? Common stock?

Hey, thank you so much for creating this! It helps me a lot on my assignment. Can I ask what do you mean by straight-line the other CA or CL? Does this mean that the value of this category will be 0 at the end of the period?

The cost is $150 and students can apply for a Career Development Grant to cover the cost. For more details and to apply, visit -funding/. If you have questions, reach out to Holly Robinson hrobi...@wesleyan.edu or Matthew Blair mbl...@wallstreetprep.com

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For example, maybe the company received a service or product and listed the expense due to the accrual principle of accounting, but the company is delaying cash payment until the due date on the invoice.

This scenario often happens with accelerated Depreciation, where a company can deduct more Depreciation on its Capital Expenditure (CapEx) spending in the early years to reduce its tax burden.

On the other hand, a high-growth tech or biotech startup is far more likely to accrue significant Net Operating Losses because these companies tend to lose money for years or decades before becoming profitable.

In short: Net Operating Losses and Deferred Tax Assets are non-existent or not meaningful for many companies. But when a company has a huge NOL balance, these items matter a lot in everything from 3-statement models to valuations to M&A deal analysis.

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

Breaking Into Wall Street is the only financial modeling training platform that uses real-life modeling tests and interview case studies to give you an unfair advantage in investment banking and private equity interviews - and a leg up once you win your offer and start working.

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