| name | financial-statements |
| description | Financial statement preparation, analysis, and interpretation. Activate when the user
mentions income statement, balance sheet, cash flow statement, P&L, profit and loss,
statement of operations, statement of financial position, indirect method, common-size
analysis, ratio analysis, DuPont analysis, trend analysis, vertical analysis, horizontal
analysis, financial statement footnotes, or asks about preparing, analyzing, or
interpreting financial statements.
|
Financial Statements
I build and analyze financial statements with the discipline of a controller preparing for board presentation and the analytical lens of a credit analyst reading them. Financial statements are the universal language of business — every other Alpha Stack skill ultimately reads from or writes to these three documents. I ensure they're built correctly and interpreted meaningfully.
Scope & Boundaries
What this skill DOES:
- Build income statements, balance sheets, and cash flow statements from trial balance data
- Prepare cash flow statements using the indirect method
- Run common-size (vertical) and trend (horizontal) analysis
- Calculate and interpret financial ratios (liquidity, profitability, leverage, efficiency)
- Perform DuPont analysis to decompose return on equity
- Identify red flags and quality-of-earnings issues
- Prepare management discussion sections for key line items
- Convert between GAAP and non-GAAP presentations (EBITDA, adjusted earnings)
Use a different skill when:
- Recording individual transactions →
/accounting
- Auditing the statements →
/audit
- FP&A variance analysis →
/fpa
- Building a DCF from projected financials → run
tools/dcf.py
- Credit analysis using financial statements →
/credit or /private-credit
Pre-Flight Checks
- Statement type: Income statement, balance sheet, cash flow, or all three?
- Basis: GAAP, IFRS, or management reporting?
- Period: Monthly, quarterly, or annual? Comparative periods?
- Data source: Trial balance, prior statements, raw data?
- Purpose: External reporting, bank covenant, investor presentation, internal management?
- Industry: Determines relevant metrics and presentation conventions
Phase 1: Income Statement
Goal: Build a clear P&L that shows the path from revenue to net income.
[Company Name]
Income Statement
For the Period Ended [Date]
Current Prior Change
Revenue:
Product revenue $[X]M $[X]M [X]%
Service revenue $[X]M $[X]M [X]%
Total Revenue $[X]M $[X]M [X]%
Cost of Revenue:
Product COGS ($[X]M) ($[X]M)
Service delivery costs ($[X]M) ($[X]M)
Total Cost of Revenue ($[X]M) ($[X]M)
Gross Profit $[X]M $[X]M [X]%
Gross Margin [X]% [X]%
Operating Expenses:
Sales & marketing ($[X]M) ($[X]M)
Research & development ($[X]M) ($[X]M)
General & administrative ($[X]M) ($[X]M)
Depreciation & amortization ($[X]M) ($[X]M)
Total Operating Expenses ($[X]M) ($[X]M)
Operating Income (EBIT) $[X]M $[X]M [X]%
Operating Margin [X]% [X]%
Other Income/(Expense):
Interest expense ($[X]M) ($[X]M)
Interest income $[X]M $[X]M
Other $[X]M $[X]M
Income Before Tax $[X]M $[X]M
Provision for income taxes ($[X]M) ($[X]M)
Effective tax rate [X]% [X]%
Net Income $[X]M $[X]M [X]%
Net Margin [X]% [X]%
Non-GAAP Reconciliation:
Net Income $[X]M
(+) D&A $[X]M
(+) Stock-based compensation $[X]M
(+) One-time restructuring $[X]M
= Adjusted EBITDA $[X]M [X]% margin
Phase 2: Balance Sheet
Goal: Present financial position at a point in time — what the company owns, owes, and is worth to shareholders.
[Company Name]
Balance Sheet
As of [Date]
ASSETS Current Prior
Current Assets:
Cash and equivalents $[X]M $[X]M
Accounts receivable, net $[X]M $[X]M
Inventory $[X]M $[X]M
Prepaid expenses $[X]M $[X]M
Total Current Assets $[X]M $[X]M
Non-Current Assets:
Property, plant & equipment, net $[X]M $[X]M
Right-of-use assets $[X]M $[X]M
Goodwill $[X]M $[X]M
Intangible assets, net $[X]M $[X]M
Other non-current $[X]M $[X]M
Total Non-Current Assets $[X]M $[X]M
TOTAL ASSETS $[X]M $[X]M
LIABILITIES
Current Liabilities:
Accounts payable $[X]M $[X]M
Accrued expenses $[X]M $[X]M
Deferred revenue (current) $[X]M $[X]M
Current portion of debt $[X]M $[X]M
Lease liabilities (current) $[X]M $[X]M
Total Current Liabilities $[X]M $[X]M
Non-Current Liabilities:
Long-term debt $[X]M $[X]M
Lease liabilities (non-current) $[X]M $[X]M
Deferred tax liabilities $[X]M $[X]M
Other non-current $[X]M $[X]M
Total Non-Current Liabilities $[X]M $[X]M
TOTAL LIABILITIES $[X]M $[X]M
EQUITY
Common stock $[X]M $[X]M
Additional paid-in capital $[X]M $[X]M
Retained earnings $[X]M $[X]M
Treasury stock ($[X]M) ($[X]M)
AOCI ($[X]M) ($[X]M)
TOTAL EQUITY $[X]M $[X]M
TOTAL LIABILITIES + EQUITY $[X]M $[X]M
(Must equal Total Assets)
Phase 3: Cash Flow Statement (Indirect Method)
Goal: Reconcile net income to actual cash generated — the most important statement for credit and valuation.
[Company Name]
Statement of Cash Flows
For the Period Ended [Date]
OPERATING ACTIVITIES
Net Income $[X]M
Adjustments for non-cash items:
Depreciation & amortization $[X]M
Stock-based compensation $[X]M
Deferred income taxes $[X]M
Amortization of debt issuance costs $[X]M
Changes in working capital:
Accounts receivable ($[X]M) ← increase = cash outflow
Inventory ($[X]M)
Prepaid expenses ($[X]M)
Accounts payable $[X]M ← increase = cash inflow
Accrued expenses $[X]M
Deferred revenue $[X]M
Net Cash from Operating Activities $[X]M
INVESTING ACTIVITIES
Capital expenditures ($[X]M)
Acquisitions, net of cash acquired ($[X]M)
Purchases of investments ($[X]M)
Proceeds from asset sales $[X]M
Net Cash from Investing Activities ($[X]M)
FINANCING ACTIVITIES
Proceeds from debt $[X]M
Repayment of debt ($[X]M)
Proceeds from equity issuance $[X]M
Share repurchases ($[X]M)
Dividends paid ($[X]M)
Debt issuance costs ($[X]M)
Net Cash from Financing Activities ($[X]M)
NET CHANGE IN CASH $[X]M
Beginning cash balance $[X]M
Ending cash balance $[X]M
Free Cash Flow (non-GAAP):
Operating cash flow $[X]M
(-) Capital expenditures ($[X]M)
= Free Cash Flow $[X]M
FCF Margin [X]%
Phase 4: Financial Ratio Analysis
Goal: Extract meaning from the statements through comparative ratios.
LIQUIDITY
Current Ratio = Current Assets / Current Liabilities = [X]x
Quick Ratio = (Cash + Receivables) / Current Liabilities = [X]x
Cash Ratio = Cash / Current Liabilities = [X]x
PROFITABILITY
Gross Margin = Gross Profit / Revenue = [X]%
Operating Margin = EBIT / Revenue = [X]%
Net Margin = Net Income / Revenue = [X]%
Return on Assets = Net Income / Total Assets = [X]%
Return on Equity = Net Income / Total Equity = [X]%
LEVERAGE
Debt/Equity = Total Debt / Total Equity = [X]x
Debt/EBITDA = Total Debt / EBITDA = [X]x
Interest Coverage = EBIT / Interest Expense = [X]x
Net Debt/EBITDA = (Total Debt - Cash) / EBITDA = [X]x
EFFICIENCY
Days Sales Outstanding = (AR / Revenue) × 365 = [X] days
Days Inventory Outstanding = (Inventory / COGS) × 365 = [X] days
Days Payable Outstanding = (AP / COGS) × 365 = [X] days
Cash Conversion Cycle = DSO + DIO - DPO = [X] days
Asset Turnover = Revenue / Total Assets = [X]x
DUPONT DECOMPOSITION
ROE = Net Margin × Asset Turnover × Equity Multiplier
= [X]% × [X]x × [X]x
= [X]%
Phase 5: Quality-of-Earnings Red Flags
Goal: Identify areas where the financial statements may not reflect economic reality.
| Red Flag | What to Check | Implication |
|----------|--------------|-------------|
| Revenue growing faster than cash collections | AR growing faster than revenue | Aggressive revenue recognition |
| Capitalizing operating costs | Capex growing while opex flat | Inflating earnings |
| Inventory build-up | DIO increasing | Demand softening or obsolescence |
| Declining cash conversion | OCF/Net Income < 1x | Earnings quality deteriorating |
| Frequent one-time charges | "Non-recurring" items every quarter | Recurring costs disguised |
| Related party transactions | Revenue from affiliates | Potential channel stuffing |
| Audit opinion changes | Qualified opinion or going concern | Serious issues |
| Deferred revenue declining | For subscription businesses | Future revenue at risk |
Quality Gates
Hard Constraints
- NEVER present adjusted/non-GAAP metrics without showing the reconciliation from GAAP
- NEVER ignore the cash flow statement — it's the hardest to manipulate
- ALWAYS verify the balance sheet balances before presenting
- ALWAYS compare to prior period — a single period in isolation is meaningless
Common Pitfalls
- Ignoring working capital changes — net income ≠ cash flow; the bridge matters
- Confusing EBIT and EBITDA — D&A is real economic cost for capital-intensive businesses
- Missing off-balance-sheet items — operating leases (pre-ASC 842), SPEs, guarantees
- Revenue without cash — if DSO is growing, the revenue may not be collectible
- Comparing companies on different bases — GAAP vs IFRS, fiscal year timing
Related Skills
/accounting — record the transactions that produce these statements/audit — verify the statements are materially correct/fpa — analyze variances and build forecasts from the statements/credit — use statements for credit analysis/data-entry — extract financial data from source documents
