1. What is financial modeling? What is a financial model used for?

A financial model is simply a tool that’s usually built in Excel to forecast,

or project, a business’ financial performance into the future.
The forecast is typically based on the company’s historical performance and
requires preparing an income statement, balance sheet, cash flow statement, and
supporting schedules (known as a “three statement model”).
From there, more advanced types of models can be built, such as discounted cash
flow analysis (DCF model), leveraged-buyout, mergers and acquisitions, and
sensitivity analysis.

The output of a financial model is used for decision making and performing
financial analysis, whether inside or outside of the company. Inside a company,
executives use financial models to make decisions about:

Raising capital (debt and/or equity)

Making acquisitions (businesses and/or assets)
Growing the business organically (e.g., opening new stores, entering new
markets, etc.)
Selling or divesting assets and business units
Budgeting and forecasting (planning for the years ahead)
Capital allocation (prioritize which projects to invest in)
Valuing a business
What is income statement?
An income statement is a financial statement that shows you the company’s
income and expenditures. It also shows whether a company is making profit or
loss for a given period. The income statement, along with balance sheet and cash
flow statement, helps you understand the financial health of your business.
The income statement is also known as a profit and loss statement, statement of
operation, statement of financial result or income, or earnings statement.

What is Balance Sheet?

A balance sheet is a financial statement that contains details of a company’s
assets or liabilities at a specific point in time. It is one of the three core financial
statements (income statement and cash flow statement being the other two)
used for evaluating the performance of a business.
Assets
An asset is something that the company owns and that is beneficial for the
growth of the business. Assets can be classified based on convertibility, physical
existence, and usage.
a. Convertibility: This describes whether the asset can be easily converted to cash.
Based on convertibility, assets are further classified into current assets and fixed
assets.
Current assets: Assets which can be easily converted into cash or cash equivalents
within a duration of one year. Examples include short-term deposits, marketable
securities, and stock.
Fixed assets: Assets which cannot be easily or readily converted to cash. For
example, buildings, machinery, equipment, or trademarks.
b. Physical existence: Assets can be of two types, tangible and intangible.
Tangible assets: Assets which you can see and feel, like office supplies, machinery,
equipment, and buildings.
Intangible assets: Assets which do not have physical existence, like patents,
brands, and copyrights.
c. Usage: Assets can be classified as operating and non-operating assets.
Operating assets: Assets which are necessary to conduct business operations. For
example, buildings, machinery, and equipment.
Non-operating assets: Short-term investments or marketable securities that are
not necessary for daily operations.

What is a cash flow statement?

A cash flow statement is an important tool used to manage finances by tracking
the cash flow for an organization. This statement is one of the three key reports
(with the income statement and the balance sheet) that help in determining a
company’s performance. It is usually helpful for making cash forecast to enable
short term planning.