NFSI cheat sheet

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this equality.

Accrual basis recognizes revenue when earned and expenses when incurred, independent of cash timing.

Depreciation methods: straight-line = (cost − salvage)/useful life; double-declining = 2 × straight-line rate × beginning book value.

Inventory: FIFO leaves ending inventory at recent costs; LIFO leaves it at older costs and in rising prices yields lower net income.

Revenue recognition five steps: identify contract, identify performance obligations, determine price, allocate price, recognize on satisfaction.

Capitalizing an expenditure defers expense and raises current income and assets relative to expensing it.

Deferred tax liability arises when book income exceeds taxable income due to temporary differences.

Classify lease payments: finance lease records asset and liability; operating lease records a single lease expense.

Cash flow statement: operating (indirect starts with net income), investing (long-term assets), financing (debt and equity).

Current ratio = current assets / current liabilities; quick ratio excludes inventory and prepaids.

DuPont: ROE = net profit margin × asset turnover × financial leverage.

Asset turnover = revenue / average total assets; receivables turnover = revenue / average receivables.

Cash conversion cycle = days inventory + days receivables − days payables.

Gross margin = (revenue − COGS) / revenue; operating margin uses operating income.

Interest coverage = EBIT / interest expense; higher values indicate greater debt-service capacity.

Common-size statements express each line as a percent of revenue (income statement) or total assets (balance sheet).

Quality of earnings is lower when accruals are large relative to operating cash flow.

Beneish-style red flags: rising days sales outstanding and inventory relative to sales growth.

WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate).

CAPM: Re = risk-free rate + beta × equity risk premium.

NPV = sum of after-tax cash flows discounted at WACC minus initial outlay; accept if NPV > 0.

IRR is the discount rate making NPV zero; accept if IRR exceeds the hurdle rate.

Free cash flow to firm = EBIT(1 − t) + depreciation − capex − increase in net working capital.

Gordon growth: value = next dividend / (required return − growth rate).

After-tax cost of debt = pre-tax yield × (1 − marginal tax rate).

Leverage raises expected ROE and beta but also raises financial distress costs.

Payback ignores time value and cash flows beyond the cutoff; use NPV as the primary criterion.

Intrinsic value estimates use dividend discount, free cash flow, and residual income models.

Dividend discount model: P0 = D1 / (r − g), valid only when g < r.

Required return = risk-free rate + beta × market risk premium; higher beta implies higher required return.

P/E = price / earnings; justified P/E = payout ratio / (r − g).

Market efficiency: weak form prices reflect past prices; semi-strong reflects public information.

Preferred stock is a hybrid: fixed dividend, priority over common, usually no voting rights.

Book value per share = common equity / shares outstanding; market-to-book compares price to book.

Growth rate sustainable ≈ ROE × retention ratio.

Stock splits and stock dividends change share count but not total equity or intrinsic value.

Fiduciary duty requires placing client interests above the professional's own interests.

Material nonpublic information must not be traded on or used to benefit others.

Independence is compromised by financial interest in a client or by close personal relationships.

Conflicts of interest must be disclosed to clients and employers; disclosure alone may not cure them.

Fair dealing requires treating all clients equitably, not equally; selective disclosure to some clients is prohibited.

Performance presentation must be accurate, fair, and not misleading; avoid cherry-picked results.

Diligence requires a reasonable basis for recommendations, including understanding the investment's risks.

Employer policies and local law may differ; follow the stricter standard when a conflict exists.

Client confidentiality applies unless disclosure is legally required or the client authorizes it.