Reporting PerformanceIncome Statement and

Statement of Cash Flow

Cash Flow Statement

Assets

Liabilities&

Equity

Income Statement

Assets

Liabilities&

Equity

Cash

Cash

Balance Sheet shows where I was

Balance Sheet shows where I am

now

Income Statement shows how I got there

Cash Flow explains how cash changed

Income Statement

Income Statement: measures performance over a certain period of time

Compares inflows (“Revenue” or “Sales”) with outflows (“Costs” or “Expenses”)

Revenue – Expenses = Net Income

Financial Statements

Personal Income StatementFor the year ended December 31, 2009

Revenue Salary $ 22,900 eBay 1,050 Total Revenue 23,950

Expenses Rent 9,500 Food 5,200 Books 750 Clothes 50 Gasoline 25 Entertainment 7,500 Total Expenses 23,025

Net Income $ 925

Business Income Statement

A business income statement reports on operating and non-operating activities.

It lists amounts for revenues less expenses over a period of time.

Sales less expenses yield the “bottom-line” net income amount.

Income Statement Components

Revenues: value received from the exchange of goods or services to customers

Expenses: cost of doing business; assets and resources used to provide those revenues

Net income: revenues less the expenses associated with getting those revenues

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Income Statement is on Accrual Basis

The Accrual Income Statement reflects the economics of the trade with the customer

Revenue is the value of what the company gives to the customer, regardless of when it gets paid. Customer gives back Cash or Accounts Receivable (cash later)

Expenses are the value of the resources used to produce whatever it is that was traded Might be paid for before used, when used or paid later

The Income Statement

Sales / Revenue (“top-line”)

- Cost of Sales = Gross Profit

- SGA, R&D, Marketing Expenses = Income From Operations +/- Interest Expense / Income = Income before Taxes

- Tax = Net Income (“bottom line”)

Every company is different but follows same general format…

Direct cost of goods provided to customers

80

Revenue 114.6$ Products Revenue 74.1$ Cost of Revenues 87.5 Cost 56.5

Gross Margin 27.1 Gross Margin 17.6

SGA 17.0 Services Revenue 40.1 Earnings from Operations 10.1 Cost 30.7

Gross Margin 9.4 Interest 0.7 Taxes 1.7 Financing Revenue 0.4

Cost 0.3 Net Income 7.7$ Gross Margin 0.1$

FY 2009

80

EBITDAEarnings before Interest, Taxes, Depreciation & Amortization

Measures operating results before costs of capital structure and taxes

Net Income 7.7$

Add Back: Depreciation / Amortization 4.8 Interest 0.7 Tax 1.7

EBITDA 14.9$

EBITDA Example

Two Companies exactly the same: Revenue Products Customers Industry Employees

Net Income: Company A $200 Company B $ 20

EBITDA Example

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A BRevenue 1000 1000Expenses 980 780Net Income 20 220

Interest 120 10

Tax 60 10

Depreciation /Amortization 50 10

EBITDA 250 250

Accrual AccountingAssets, liabilities, revenues, and expenses are put on the financial

statements when the transaction that causes them occurs, not when cash is

paid or received.

Required by GAAP.

Cash may be paid or received at same time, but this has

NOTHING to do with when the info goes on the financial

statements

Accrual Basis

Revenues are earned and recorded when goods or services are provided to customers

Expenses are incurred and recorded when the resources are used to create the goods and services

provided to the customer

The matching principle requires that expenses be recorded in the same period as the associated revenue, NOT the period in which they are paid

ExerciseBig and Rich Hats LLC - 2008

Buys hats from suppliers: value of $175k $25k paid in 2008, balance on credit

Sells goods to customers: invoice value of $200k Received $150k in cash Remainder to be paid in 2009

Big and Rich Performance

19

CashAccounting

Revenue 150

Expenses 25

Net Income 125

Big and Rich Performance

20

Cash Accrual Accounting Accounting

Revenue 150 200

Expenses 25 175

Net Income 125 25

Revenue Recognition Rules in GAAP

Revenue is recognized when all conditions are met:

1. Persuasive evidence of an arrangement exists

2. Delivery of products or services has occurred

3. Price is fixed and determinable

4. Collection is reasonably assured

…often lots of judgment in determining revenue

Revenue Recognition Rules in GAAP

Revenue is recognized when all conditions are met:

1. Persuasive evidence of an arrangement exists

2. Delivery of products or services has occurred

3. Price is fixed and determinable

4. Collection is reasonably assured

…often lots of judgment in determining revenue

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85 – 88

25

87

Revenue Games ExerciseBlue Train Computer Corp.

List Price: Hardware $20

Software License $1 / month

Full Maintenance $2 / month

Mingus Inc. purchases system for $20; includes 3 months of software license and 1 month warranty

“Irrevocable” contract signed Nov 24. 2009: $5 non refundable deposit with contract $5 per month Jan 2010 – Mar 2010 If no pay, only recourse is take back hardware

Dec 31, 2009: ½ hardware delivered Jan 31, 2010: ½ hardware delivered Feb 28, 2010: software delivered Mar 31, 2010: system up and running

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Percentage-of-Completion

For certain industries requiring long-term contacts, revenue is by determining the costs incurred to date compared with the project’s total expected costs.

Percentage-of-completion method requires an estimate of total anticipated costs.

This estimate is made at the beginning of the contract and is used to initially bid the contract.

Percentage-of-Completion

2005 10-K report footnotes of Raytheon Company:

Unearned Revenue

Deposits from customers are liability until service obligation is fulfilled

Expense Rules in GAAP

Once revenue is determined, then expenses are recorded

The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue

Expense Rules in GAAP

Once revenue is determined, then expenses are recorded

The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue

…even more judgment in expenses

Accrual-Based Measurement of Expenses

Company incurs a cost.

Expense

If benefit is for current period, report the cost

as…

As the benefits are used up, reduce the asset and

report this cost as…

Asset

If benefit extends to future periods, initially

report the cost as…

A capitalized cost is the cost that is reported as an asset on the balance sheet.

80

34

95

Earnings Per Share

36

102 – 103