Financial Modeling & Forecasting Flashcards

In a three-statement financial model, which statement serves as the primary driver that feeds into both the balance sheet and cash flow statement?

Answer: Income statement

The income statement drives net income, which flows into retained earnings on the balance sheet and is the starting point for the cash flow statement.

A company's Days Sales Outstanding (DSO) is 45 days. If annual revenue is $3.6 million, what is the approximate accounts receivable balance?

Answer: $444,000

DSO = (AR / Revenue) × 365, so AR = (45 / 365) × $3,600,000 ≈ $443,836.

Which forecasting method assigns different weights to historical data points, giving more importance to recent periods?

Answer: Exponential smoothing

Exponential smoothing applies a smoothing factor that gives exponentially decreasing weight to older observations.

When building a sensitivity analysis in a financial model, what is the primary purpose of a data table in Excel?

Answer: To show how output changes across multiple input variable combinations

A data table simultaneously calculates results for a range of one or two input variables, showing their combined impact on a key output.

In financial modeling, 'hardcoding' refers to:

Answer: Entering a fixed numeric value directly into a formula cell

Hardcoding means embedding a literal number directly in a formula rather than referencing a designated input cell, making models harder to audit and update.

A bottom-up revenue forecast differs from a top-down forecast in that it:

Answer: Begins with individual product/customer-level data to build total revenue

A bottom-up approach aggregates granular unit-level or customer-level projections to arrive at total revenue, while top-down starts from market size.

Which metric best measures how efficiently a company converts net income into free cash flow?

Answer: Cash conversion ratio

The cash conversion ratio (FCF / Net Income) shows what fraction of reported earnings actually becomes spendable cash.