How to Simplify and Consolidate the Financial Statements

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In this lesson, you'll learn how to SIMPLIFY and consolidate the financial statements when you're building 3-statement projection models for companies.
By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
Chipotle's Statements:

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Practice Exercise:

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"After": http://youtube-breakingintowallstreet...

Table of Contents:

2:12 The Process of Simplifying and Consolidating the Statements

7:39 Walk-Through for Chipotle's Statements

8:47 Balance Sheet - Assets Side

16:19 Balance Sheet - L&E Side

21:31 Smaller Items and Random Problems

24:21 Recap and Summary

Why Does This Matter?

Tons of people jump into projecting the financial statements
without ever THINKING about what they're doing!

That creates 2 problems:

Problem #1: It will be MUCH tougher to project and link items later
on, unless you simplify and consolidate the financial statements before doing anything else first.

Problem #2: "Help, my Balance Sheet doesn't balance!"

But the problem is that you STARTED OUT THE WRONG WAY!

The Balance Sheet will be exceptionally difficult to balance unless you simplify the statements and ensure that you know how the items are linked before you start projecting anything.

Goal:

Each item on the Balance Sheet should have a corresponding
item on the Cash Flow Statement, and vice versa.

If you CANNOT establish this link, then you need to add in appropriate items in some cases, and consolidate items in other cases.

To illustrate this, we'll go through an example for Chipotle, a
chain of Mexican restaurants based in the US, and you'll learn how to simplify and consolidate their financial statements.

Rules of Thumb for Consolidating and Simplifying the Financial
Statements:

1. Hard-code ALL the historical numbers except for possibly the BS/CFS cash (and that one is only to check that you entered the data correctly).

Trust us, the historical statements will NEVER link properly no
matter what you do - don't even try!

It's because companies group items differently from how they're shown in their public filings.

2. Keep the Income Statement largely as-is for 99% of companies -
maybe separate out Gains / (Losses) or Impairments if those are not shown separately.

3. Balance Sheet and Cash Flow Statement - A bit trickier to
describe, but here's the basic idea:

IFRS / Direct Method - If a company uses the Direct Method for
its Cash Flow Statement, or otherwise starts it with something other than Net Income, you'll have to adjust it by following the reconciliation in its filings.

This will make your life much easier later on!

Not relevant in this example since Chipotle uses the Indirect Method, and so its CFS starts with Net Income.

a) First, check the BS against the CFS and try to figure out
which item should link where.

For example, Receivables on the BS will always link to the Change
in Receivables on the CFS… but you run into issues with lots of smaller items that don't have apparent links elsewhere.

Examples Here: Current Deferred Tax Assets, Accrued Payroll and Benefits.

b) When this happens, consolidate these items and make sure
there's always a corresponding entry on the other statement.

Here, we consolidated Current Deferred Tax Assets into "Prepaid Expenses & Other Current Assets" and consolidated "Accrued Payroll and Benefits" into "Accrued Liabilities."

c) Make sure the location of different items makes sense - on
IFRS Cash Flow Statements, you'll often see items like
dividends in the CFO section, or investment-related items in the
CFF section, so feel free to move those around.