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• We will begin with financial statements analysis

• The SEC requires all companies that sell securities to the public to disclose information about the company’s operations and performance– For shareholders and analysts this is the primary

source of information about the company.– Users can also rely on the regularity of the reports,

i.e., you can expect an update every quarter

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• Company filings can be accessed through the SEC’s EDGAR database:

http://www.sec.gov/edgar/searchedgar/companysearch.html

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• Three primary financial statements– Balance sheet– Income statement– Cash flow statement

• Fourth statement– Statement of shareholders’ equity

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• Balance sheet– Statement of the firm’s investments and who has

claims to the payoffs from those investments– Lists assets, liabilities, and shareholders’ equity

• Assets – investments that are expected to generate payoffs. – Current assets – assets that are expected to be converted to cash

within a year

• Liabilities – claims to the payoffs by claimants other than shareholders (e.g. debt holders --- banks and/or bond holders, suppliers)– Current liabilities – cash will be needed to settle these claims

within a year

• Shareholders’ equity – claim by the owners.

– Balance sheet equation:• Shareholders’ equity = Assets - Liabilities

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• Let’s get SBUX’s latest annual financial statements

Type 10-K

Click on “Interactive Data”

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Total Assets

Total Liabilities

Shareholders’ equity

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• Income statement– Displays the sources of net income• Net income – “bottom line” measure of how

shareholders’ equity increased or decreased as a result of business activities (we will also refer to business activities as operations)• Broadly speaking, Net Income = Revenues - Expenses

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• Typical income statement format Net revenue- Cost of goods sold= Gross profit- Operating expenses= operating income before taxes (EBIT)- Interest expense= Income before taxes- Income taxes= Income after tax and before extraordinary items+ Extraordinary items= Net income- Preferred dividends= Net income available to common shareholders

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• Cash flow statement– Describes how the firm generated and used cash

during the period– Three types of cash flows• Cash flow from operations – cash generated from

selling products minus cash used up to sell the products• Cash flow from investing activities – cash spent on

buying assets to be used in operating activities minus cash received from selling assets• Cash flow from financing activities – cash transactions

to raise cash from debt (borrow) or equity (issue new shares) minus cash paid to debt (pay debt) or equity holders (dividends and/or repurchases)

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• Statement of shareholders’ equity– Explains how shareholders’ equity changed over

the period• Ending equity = Beginning equity + Comprehensive

income – Net payout to shareholders– Comprehensive income = Net income + Other comprehensive

income

– Shareholders’ equity• Increases from earnings from business activities• Decreases if there is a net payout to shareholders

– Net payout = Proceeds from share issues – Total payout– Total payout = dividends+ repurchases

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