Case Study Round Help

Based on the highest ranked content on WSO and common practices in financial modeling, it sounds like you're encountering a discrepancy that can occur for a few reasons. Let's break down the situation and potential reasons for the differences you're observing:

1. Operating Income vs. Net Income: Typically, Operating Income is calculated as Gross Profit (GP) minus Operating Expenses (which includes SG&A, Depreciation & Amortization (D&A), and sometimes other operating expenses), but before interest and taxes. Net Income, on the other hand, is what remains after all expenses, including interest and taxes, have been subtracted from Total Revenue.

2. Mislabeling in the P&L: The description you provided suggests that what's being labeled as "Operating Income" in your P&L is actually closer to what many would consider "Net Income" since it subtracts taxes and interest expenses from Gross Profit. This could be a case of mislabeling or a non-standard presentation of the financial statements.

3. Discrepancy between P&L and CFS Net Income: The difference in Net Income figures between the Profit & Loss Statement (P&L) and the Cash Flow Statement (CFS) could be due to several factors:

   • Non-Cash Adjustments: The CFS adjusts the Net Income for non-cash items like Depreciation & Amortization, which might have been treated differently in your P&L calculation.
   • Working Capital Changes: Changes in working capital components (like Accounts Receivable, Inventory, Accounts Payable) can affect the cash from operations and thus alter the Net Income figure on the CFS.
   • Interest and Taxes: If interest and taxes are treated differently between the P&L and CFS (e.g., if taxes paid in cash differ from the expense recognized in the P&L), this could lead to discrepancies.

4. Steps to Resolve:

   • Review Financial Statement Notes: Sometimes, the notes accompanying financial statements provide clarity on accounting policies that could explain discrepancies.
   • Check for Non-Operating Income/Expenses: Ensure that all non-operating income and expenses are accounted for correctly. Sometimes, companies have items that are not included in the operating income but are part of the net income.
   • Reconciliation Effort: Attempt to reconcile the Operating Income figure with the Net Income figure on the CFS by accounting for all known adjustments, including interest, taxes, non-cash items, and working capital changes.

In summary, it seems there might be a mix-up in the labeling or a non-standard presentation of the financials you're working with. Additionally, the discrepancy between the P&L and CFS could stem from the treatment of non-cash items, working capital changes, or other adjustments not captured in your initial calculation. It's not uncommon to encounter such challenges in case study rounds, and demonstrating your thought process in identifying and addressing these discrepancies can be just as valuable as presenting a flawless model.

Sources: 1st Yr Banking Analyst Open for Questions, FDD / TAS Interview and Case Study Mini Guide, 21 Finance Interview Questions and Answers, FDD / TAS Interview and Case Study Mini Guide, Two listed companies have the exact same Financial Statements, yet the P/E Multiple of company A is 2x the P/E of B. Why?