Investment Banking FAQ’s Answered

Investment banking can be a challenging and complex industry, which means it is likely that you will have questions, particularly when starting out. However, it can sometimes seem daunting to ask associates questions, especially when they are busy. To solve this problem, we decided to answer six investment banking FAQ’s.

1) Why do we do accounting, modeling and valuation?

To put it simply, we learn accounting so we can understand the financial history of a company. We do modeling to understand the financial future of a company and see if it is attractive, and if it is attractive we will then do valuation to calculate how much to pay.

 2) What is amortization vs. depreciation?

Amortization is the planned reduction in value of intangible assets, such as copyright. It is the same as depreciation of tangible assets, such as machinery.

3) Why does revenue recognition matter?

Revenue (or sales, or turnover) can accidentally be recorded in the wrong period.  For instance, if I receive an order in January, deliver in February, and collect payment in March, what month should I record the revenue? Revenue recognition helps to create a solution by stopping companies moving revenue between different periods.

4) Where is depreciation in the IS?

Depreciation is usually spread between a number of line items, typically the cost of goods sold line and the selling, general and admin line. This makes it difficult to identify, so, instead, we get it from the notes.

5) Why do we manipulate accounting numbers for financial analysis?

Accountants prepare accounting numbers, focusing on accurately recording the past. Financial analysts evaluate accounting numbers for a future purpose, and this purpose may not be what the accounts were designed for. If a company wants to raise funds, the financial analyst needs to know the true indebtedness of the company, which means using accounts to total up debt like items, less any financial assets such as cash. This number won’t be provided by the accounts but can be found through manipulation.

6) Can I use an Apple Mac for modeling?

Financial services are conducted on a range of operating systems and computers. Excel on a Windows based computer is currently dominant for analyst financial modeling, therefore, if you are learning Excel shortcuts, this is best done on a Windows based computer.