Spot out the weird issues with P&L and Cashflow statement

Water Cooler Investing
#1

I’m looking at some financial statements of a company with 5 years historical data and it goes like this:

  1. In the P&L:

Revenue = 5000

COS = -3000

Gross Profit = 2000

Operating Expense = -1400

D&A = -300

EBIT = 700

Interest Expense = -100

Tax Expense = -300

Net Income = 300

What happen with the EBIT?? Thought EBIT should be = Gross Profit - Opex - D&A = 300?

  1. In Cash Flow Statement (of the same year):

Net Income = 300

Add: D&A = +700

Change in Working Capital = 400

Net Cashflow from Operating Activity = 600

What happened with the D&A here? Why isn’t it the same as D&A in the Income Statement above @ +300?

Am I missing something here?

#2

Did you build this P&L statement or is it from a data provider

#3

From a very trustworthy provider and confirm everything was correct. Should be correct as all the other years also have similar issue. I suspect

(1) Between Gross Profit, Operating Expense there should be Other Income/Expense before coming down to EBIT ?

(2) However I still don’t get it why D&A in Income Statement can be different from D&A in Cashflow. Never seen this before. Any suspect for the reason?

For the Operating Expense, is there any case that D&A already part of Operating Expense in reporting? Usually I see D&A is not part of Operating Exense and should be in a separate line, but not sure if that rule is universal. Any thought?

#4

Use the d&a from the cash flow statement. I’ve seen companies report a d&a as an expense item, but part of cost of sales includes some d&a as well. The expense might be depreciation of corporate assets, while the d&a in cost of sales could be related to production equipment.

EBIT being 700 and not 300 is strange. It must include an Other Expense item. If this is from a provider, then maybe check the actual regulatory filing.

#5

In fact this is from a case study I’m reviewing so no actual regulatory filing to check agaisnt. Assuming part of the D&A is already in the Operating Expense or Cost of Sales, then the Gross Profit or (Gross Profit - Opex) have already exlcuded the D&A cost, then (Gross Profit - Opex) will results in EBIT. However in this case there’s a line of D&A here and it fits no where (or even differ from D&A in Cash Flow Statement)

I’m a bit confused. What’s the trick here?

#6

whoa what is this? I would like to know the answer as well! Any analysts out there?

#7

So, if the EBIT is not equal to (Gross Profit - Operating Expense - D&A), and that the D&A in Income Statement is so different (by 2-3 times) what will you do in the forecast?

Any thought of making judgement here?

#8

Hey there,

Let me explain what’s going on in your example above. D&A in the income statement does not really show the exact amount of aggregate D&A. The true amount of D&A is always shown in the cash flow statement because it shows the total amount of depreciation reflected in SG&A and COGS! however the income statement does not reflect the amount shown in COGS so what I advise you to do is the following:

Revenue

Less COGS

Gross Profit

Less SGA

Less D&A (take the number from cash flow, allocate the % of it to SG&A and remaining take it out from COGS)

Operating Profit

Interest Expense

etc…

EBITA = operating profit + D&A + other non cash charges (stock based comp if found)

EBIT = Operating Profit

I hope this helps :slight_smile:

#9

Thanks Bilal. D&A is fine now.

Now i’m looking at Retained earning. Usually:

(1) Ending RE = Begining RE + Net Income after tax - Dividend paid

However the audited reported RE is not following the above formula. In one case, it follows the below formula:

(2) Ending RE = Begining RE + Net Income after tax - Dividend paid - Change in NonControlling Interest)

Two questions:

a. What is the role of Change in NonControlling Interest here? Why have to substract that out from RE?

b. In some cases, neither (1) nor (2) can derive the same reported RE as in the annual reports. What is missing here?

#10

Ending RE = Beginning RE + Net Income Allocated to Shareholders / Equity holders of the Company - Dividends Paid

So if you are taking Net Profit (Total) then you need to take into consideration share of minority interest in the company to adjust for the above formula.

#11

Another weird part is in the Change in Working Capital in Cash Flow Statement in which it used (CA-CL), and Cash is included in the CA. When doing modelling, if the Ending Cash Balance is part of the Change in Working Capital formula, but the Change in Working Capital needs the Ending Cash Balance to calculate the Change in Cash during the year, it creates a circula reference.

Any advice on how to avoid this issue?