What is Scenario Analysis? Scenario analysis is a process of examining and evaluating possible events or scenarios that could take place in the future and predicting the various feasible results or possible outcomes. In financial modeling, the process is typically used to estimate changes in the value of a business or cash flow, especially when…
Projecting Income Statement Line Items When building a three statement model, it becomes necessary to get into the habit of projecting income statement line items. Being able to project the main line items of the income statement should become second nature. Each specific line item will have drivers that impact their future values. In fact,…
What is a Three-Statement Model? A three-statement model links the income statement, balance sheet, and cash flow statement into one dynamically connected financial model. Three-statement models are the foundation on which more advanced financial models are built, such as discounted cash flow (DCF) models, merger models, leveraged buyout (LBO) models, and various other types of…
What are Accounting Ratios? Accounting ratios cover a wide array of ratios that are used by accountants and act as different indicators that measure profitability, liquidity, and potential financial distress in a company’s financials. The ratios are used by accountants and financial professionals to communicate and investigate problems or successes within a designated time period….
What is the Applicable Federal Rate? The applicable federal rate (AFR) is the interest rate that applies to personal loans. It is the minimum rate applicable to such loans under U.S. law. The AFR is implemented in the form of federal tax regulations that are enforced by the Internal Revenue Service (IRS). The applicable federal…
What are Administrative Expenses? Administrative expenses refer to the costs incurred by a company or organization that include, but are not limited to, the salaries and benefits of the administrative workers within the company or organization, as well as rent and managerial compensation. Also known as General and Administrative expenses, the costs are categorized separately…
What is an Accounting Information System (AIS)? An accounting information system (AIS) refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions. It is considered a pivotal component of finance offices throughout the world. The systems are largely software-based and can be deployed as…
What is Accretive? In the financial context, accretive refers to an incremental benefit that occurs after a financial transaction. Depending on how it is used financially, it can refer to capital gains, a corporate finance transaction, or an accounting expense. Knowing the difference is pivotal to being an informed finance professional to ensure the data…
What is an Economic Stimulus Package? An economic stimulus package is a combination of economic measures utilized by a government to stimulate a struggling economy. The stimulus package can be used as a preventive or reversing measure to stop or prevent a recession by lowering interest rates, increasing government spending, and quantitative easing, etc. aimed…
What is Unlevered Free Cash Flow? Unlevered Free Cash Flow (also known as Free Cash Flow to the Firm or FCFF for short) is a theoretical cash flow figure for a business. It is the cash flow available to all equity holders and debtholders after all operating expenses, capital expenditures, and investments in working capital…
