ForgewellCertification Platform
Course dashboard
Preview Module 1

Finance and Accounting Foundations

Read financial statements together, calculate operating metrics, and translate accrual accounting into cash flow.

Outcome

Read the three statements together, calculate EBITDA / EBIT / margins / working capital, and translate accrual accounting into cash flow.

Case prompt

Review a simplified industrial company with $250M of revenue, seasonal inventory, rising receivables, and a major capex program. Identify why EBITDA improved while cash conversion deteriorated.

18 min

Income Statement Architecture

Lesson

Understand revenue, COGS, gross profit, operating expenses, EBITDA, EBIT, taxes, and net income.

Core concepts

  • - Is the metric defined consistently across historical and forecast periods?
  • - Does the formula use the correct sign convention?
  • - Can the assumption be defended with operating evidence?

Example

The income statement explains performance over a period, but it is built on accrual accounting rather than pure cash movement. A good analyst separates operating performance from financing, non-operating items, and tax effects before using the statement for valuation. EBITDA is useful because it normalizes D&A and financing choices, but it must never be treated as free cash flow.

Formula block

EBITDA = Revenue - COGS - Cash Operating Expenses

Practice assignment

Calculate gross margin, EBITDA margin, and EBIT margin for a company with $250M revenue, $145M COGS, $62M opex, and $11M D&A.

Expected deliverable

Annotate the schedule with source, assumption owner, formula, and reasonableness check so another reviewer can audit it without your narration.

Mistakes to avoid

  • - Hardcoding a calculated output instead of linking it to the operating driver.
  • - Mixing enterprise value and equity value when moving between multiples and per-share metrics.
  • - Using a positive working-capital sign convention in one schedule and a negative convention somewhere else.
  • - Applying a forward multiple to a historical denominator or a historical multiple to a forward denominator.

17 min

Balance Sheet Mechanics

Lesson

Read assets, liabilities, and equity as a snapshot of operating investment and financing.

Core concepts

  • - Is the metric defined consistently across historical and forecast periods?
  • - Does the formula use the correct sign convention?
  • - Can the assumption be defended with operating evidence?

Example

The balance sheet shows what the company owns, what it owes, and the residual claim held by shareholders. Operating assets such as receivables and inventory usually require cash investment before they create cash collection. Debt, preferred equity, and minority interest are financing claims that matter when moving from enterprise value to equity value.

Formula block

Assets = Liabilities + Shareholders' Equity

Practice assignment

Classify ten sample line items as operating assets, operating liabilities, debt-like items, cash-like items, or equity.

Expected deliverable

Annotate the schedule with source, assumption owner, formula, and reasonableness check so another reviewer can audit it without your narration.

Mistakes to avoid

  • - Hardcoding a calculated output instead of linking it to the operating driver.
  • - Mixing enterprise value and equity value when moving between multiples and per-share metrics.
  • - Using a positive working-capital sign convention in one schedule and a negative convention somewhere else.
  • - Applying a forward multiple to a historical denominator or a historical multiple to a forward denominator.

19 min

Cash Flow Statement Bridge

Lesson

Reconcile accrual earnings to operating, investing, and financing cash flow.

Core concepts

  • - Is the metric defined consistently across historical and forecast periods?
  • - Does the formula use the correct sign convention?
  • - Can the assumption be defended with operating evidence?

Example

The cash flow statement explains why net income and cash generation differ. Non-cash expenses such as D&A are added back; increases in operating assets are usually cash outflows; increases in operating liabilities are usually cash inflows. Capex sits in investing cash flow and is one reason EBITDA can overstate recurring cash generation.

Formula block

Operating Cash Flow = Net Income + D&A - Change in NWC

Practice assignment

Bridge $30M of net income to operating cash flow after $12M D&A, a $9M AR increase, a $4M inventory decrease, and a $3M AP increase.

Expected deliverable

Annotate the schedule with source, assumption owner, formula, and reasonableness check so another reviewer can audit it without your narration.

Mistakes to avoid

  • - Hardcoding a calculated output instead of linking it to the operating driver.
  • - Mixing enterprise value and equity value when moving between multiples and per-share metrics.
  • - Using a positive working-capital sign convention in one schedule and a negative convention somewhere else.
  • - Applying a forward multiple to a historical denominator or a historical multiple to a forward denominator.

20 min

Working Capital Deep Dive

Lesson

Model receivables, inventory, and payables using days metrics and cash conversion logic.

Core concepts

  • - Is the metric defined consistently across historical and forecast periods?
  • - Does the formula use the correct sign convention?
  • - Can the assumption be defended with operating evidence?

Example

Working capital is where many good earnings stories become weak cash stories. Days sales outstanding, days inventory outstanding, and days payable outstanding convert balance sheet accounts into operating timing assumptions. Forecasting working capital from days metrics is usually more defensible than applying arbitrary percentage-of-revenue changes.

Formula block

DSO = Accounts Receivable / Revenue x 365

Practice assignment

Use DSO, DIO, and DPO assumptions to forecast AR, inventory, and AP for a growing manufacturer.

Expected deliverable

Annotate the schedule with source, assumption owner, formula, and reasonableness check so another reviewer can audit it without your narration.

Mistakes to avoid

  • - Hardcoding a calculated output instead of linking it to the operating driver.
  • - Mixing enterprise value and equity value when moving between multiples and per-share metrics.
  • - Using a positive working-capital sign convention in one schedule and a negative convention somewhere else.
  • - Applying a forward multiple to a historical denominator or a historical multiple to a forward denominator.

16 min

Accruals, D&A, and Quality of Earnings

Lesson

Spot when accounting profit may not reflect sustainable operating economics.

Core concepts

  • - Is the metric defined consistently across historical and forecast periods?
  • - Does the formula use the correct sign convention?
  • - Can the assumption be defended with operating evidence?

Example

Quality of earnings analysis asks whether reported profit is recurring, cash-backed, and comparable. D&A reduces taxable income but does not consume current-period cash; capex does consume cash but may not hit earnings immediately. Analysts should flag unusual gains, aggressive capitalization, inventory write-down risk, and customer concentration before relying on margins.

Formula block

Cash Conversion = Operating Cash Flow / EBITDA

Practice assignment

Draft three diligence questions for a company whose EBITDA margin rose while cash conversion fell below 50%.

Expected deliverable

Annotate the schedule with source, assumption owner, formula, and reasonableness check so another reviewer can audit it without your narration.

Mistakes to avoid

  • - Hardcoding a calculated output instead of linking it to the operating driver.
  • - Mixing enterprise value and equity value when moving between multiples and per-share metrics.
  • - Using a positive working-capital sign convention in one schedule and a negative convention somewhere else.
  • - Applying a forward multiple to a historical denominator or a historical multiple to a forward denominator.

Chapter quiz

Finance and Accounting Foundations quiz

Sign in to save your attempts to your account and continue from any device.

Question 1

Accounting foundations / calculation

1. A company has revenue of $100M and EBITDA of $20M. What is its EBITDA margin?

Question 2

Accounting foundations / scenario

2. If accounts receivable increases, what is the impact on cash flow, all else equal?

Question 3

Accounting foundations / multiple-choice

3. Which metric sits below EBITDA but above EBIT?

Question 4

Accounting foundations / interpretation

4. Inventory days increase from 55 to 72 while revenue is flat. What is the most likely cash-flow implication?

Question 5

Accounting foundations / multiple-choice

5. Which item is normally added back when bridging net income to operating cash flow?