Unlocking Financial Statements - Day 2

Online SeminarDay 2

July 19, 2011

UnlockingFinancial

Statements

Understanding Financial Statements2

An Online Seminar Presented By

The Donald W. Reynolds National Center

For Business Journalism

At Arizona State University


Presented By

James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communication University of Kansas [email protected]

Schedule for Week Day 1: Introduction to financial

statements Day 2: Income statement Day 3: Balance sheet Day 4: Cash flows Day 5: Beyond the basics



The Income Statement

Income Statement


Accrual vs. Cash Accrual method

Income Statement Balance Sheet

Cash method Statement of Cash Flows



Accrual Method Records revenues as soon as the “sale”

occurs Records expenses as soon as the bill is

received IE, transactions enter the financial

records when they occur, not when cash changes hands

Accrual method, therefore, shows “scores,” not real spendable dollars


About These Numbers: They’re Squishy Goods will not necessarily be paid for Goods are not necessarily going to be

kept Inventory might be out of date, obsolete

or unsellable Status of some inventory may be

uncertain Intangible assets are estimates


About These Numbers: They’re Squishy (cont.) Machinery or other fixed assets might

be obsolete or falling apart long before the so-called useful life is up

Goodwill Impairment Bottom line: In many ways, statements

are a collection of estimates.

Because They’re Squishy

You need to know the rules and assumptions used to create the numbers



Income Statement or ... Statement of earnings Statement of operations Statement of income and

comprehensive income


Income Statement Covers a period of time, typically a year

or quarter Reports income from ongoing activities Reports income from activities beyond

management’s control (comprehensive income)

Involves estimates


Basic Income Statement Sales or revenues Expenses Taxes Net income or profit


Income Statement Sales or revenues Cost of goods sold Gross profit Operating expenses

Sales, general and administrative Depreciation, amortization

Operating profit Other income/expenses Interest Income taxes Net income or profit


Cost of Goods Sold Expenses incurred in the cost of

manufacturing or creating or acquiring the product the company sells.


Cost of Goods Sold Manufacturer: What the company pays

for inventory, i.e. raw materials and supplies used to make its product(s). Includes price of raw materials plus cost of turning it into a product, and transportation costs, i.e. direct factory labor, overhead costs, energy costs. Inventory is largest percent of CGS for manufacturer.


Cost of Goods Sold Retailer: What the company pays

suppliers for the products it sells on its shelves. Only the cost of merchandise purchased for resale, not the cost of providing the service to customers.

Service business: Since it doesn’t make or sell a product per se, typically find a modest CGS.


SGA Includes office expenses, accounting,

shipping department, advertising, R&D, depreciation and other expenses that can’t be directly attributed to particular items for sale.

Often includes depreciation and amortization.


Other Income/Expenses Discontinued items Unusual/extraordinary items Changes in accounting principle Impairment charge Sale of investment Minority interest


Thinking Inside the Box Revenues Minus cost of goods sold Equals gross profit Minus operating expenses Equals operating profit Minus or plus other expenses/income Minus or plus interest expenses/income Minus income taxes Net income


Inside the Box Earnings Sales or revenues Cost of goods sold Gross profit Operating expenses

Sales, general and administrative Depreciation, amortization

Operating profit

Earnings Per Share Basic earnings per

share (Bloomberg) Diluted earnings per

share (Wall Street Journal, fully diluted)



Pro Forma Results Expenses against earnings are not

standardized across an industry Selectively defined earnings Common pro forma: EBITDA Recommendation: GAAP results should

precede pro forma results in earnings releases

Headlines should show GAAP earnings


Pro Forma Results SEC’s Regulation G (1/03) states that

non-GAAP numbers used in an earnings release must be accompanied by, and reconciled with, the “most directly comparable GAAP number”

Pro forma has value for many companies

“As a matter of form”

Career

Unlocking Financial Statements - Day 2