Day Five with Jimmy Gentry: Understanding Financial Statements
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Transcript of Day Five with Jimmy Gentry: Understanding Financial Statements
Understanding Financial Statements
Online SeminarDay 5
Nov. 13, 2009
Understanding Financial Statements2
An Online Seminar Presented By
The Donald W. Reynolds National Center
For Business Journalism
At Arizona State University
Understanding Financial Statements3
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
Understanding Financial Statements4
Beyond the Basics
Understanding Financial Statements5
Understanding Financial Statements6
Income Statement Sales or revenues Cost of goods sold Gross profit Sales, general and administrative Operating profit Other income/expenses Interest Income taxes Net income or profit
Understanding Financial Statements7
Other Income/Expenses Discontinued items Unusual/extraordinary items Changes in accounting principle Impairment charge Sale of investment Minority interest
Understanding Financial Statements8
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 ncome taxes Net income
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Earnings Per Share Basic earnings per share
(Bloomberg) Diluted earnings per share (Wall
Street Journal, fully diluted)
Understanding Financial Statements10
Balance Sheet It balances Assets = Liabilities + Shareholders’
Equity
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Assets Current assets
Cash and cash equivalents Accounts receivable Inventories Prepaids
Investments and other assets
Understanding Financial Statements12
Assets Property, plant and equipment, net
Land and improvement Buildings and improvements Equipment Less accumulated depreciation
Goodwill and other intangibles
Understanding Financial Statements13
Goodwill Difference between what a firm pays to buy
another company and the book value (total assets minus total liabilities) of that company.
Has been written off over time, typically 40 years
No longer amortize Other intangible assets will continue to be
amortized over useful lives
Understanding Financial Statements14
Impairment Instead of writing off over time, now use
“impairment testing” The impairment is expensed on the
income statement
Understanding Financial Statements15
Liabilities Current liabilities
Accounts payable Accrued liabilities Income taxes Current maturity of long-term debt
Noncurrent liabilities Long-term debt Deferred income taxes
Commitments and contingencies
Understanding Financial Statements16
Shareholders’ Equity Capital stock
Preferred stock Common stock
Additional paid-in capital Retained earnings Treasury stock
Total shareholders’ equity Total L + OE
Understanding Financial Statements17
Cash Flows From operations From investing From financing
Understanding Financial Statements18
Free Cash Flow Several ways to calculate it Companies create their own models Gross way to do it:
Cash from operating activities Minus capital expenditures Equals free cash flow
Understanding Financial Statements19
American Standard Model
Cash from operating activities Minus capital expenditures Plus proceeds from disposal of property Plus proceeds from sale and
leasebacks Equals free cash flow
Understanding Financial Statements20
A Basic Look at the Numbers Look at changes in amounts year to year, especially
revenues and expenses Look at numbers that are significantly larger or
smaller than the previous period Look at the trend line for sales/revenues, operating
income and net income. Calculate percentage change for each.
Look at the trend for cash flow Look at the trend for free cash flow Tie the numbers to the footnotes
The Next Step Calculate percentage change year-to-
year or over several years … Especially for large numbers that are
significantly larger or smaller than the previous period …
Especially for sales/revenues, operating income, net income, cash and free cash.
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Identify trends Identify what causes changes in totals on
financial statements Easier to compare percentages than raw
numbers Easier to compare companies Easier to compare companies with industry
averages
Understanding Financial Statements22
Common Size
Understanding Financial Statements23
Common Size Analysis For Income Statement, divide all entries
by revenue For Cash Flows, divide all entries by the
total increase or decrease of cash inflows for the year (add cash from operating, investing and financing)
Comparable Statements Often have to restructure Income
Statement to the in-the-box format we discussed
Typical problems come from items we would consider Other Income/Expenses
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Trends in Margins How have Cost of Goods Sold and
Sales, General and Administrative changed?
What does that mean for Gross Margins and Operating Margins?
Value of using Basis Points
Understanding Financial Statements25
Ratio Analysis Takes your analysis to yet another level Finance types especially fond of ratios
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Common Size, Ratios These techniques let you drill below the
surface and start developing a more complete picture of the company’s performance Strengths Weaknesses Strategic effectiveness
Understanding Financial Statements27