Day Two with Jimmy Gentry: Understanding Financial Statements


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Jimmy Gentry presents "Understanding Financial Statements," a Webinar hosted by the Donald W. Reynolds National Center for Business Journalism. For more information, visit

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Day Two with Jimmy Gentry: Understanding Financial Statements

  1. 1. Understanding Financial Statements <ul><ul><ul><ul><ul><li>Online Seminar </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Day 2 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>No. 10, 2009 </li></ul></ul></ul></ul></ul>
  2. 2. <ul><li>An Online Seminar Presented By </li></ul><ul><li>The Donald W. Reynolds National Center </li></ul><ul><li>For Business Journalism </li></ul><ul><li>At Arizona State University </li></ul>Understanding Financial Statements
  3. 3. Presented By <ul><li>James K. Gentry, Ph.D. </li></ul><ul><li>Clyde M. Reed Teaching Professor </li></ul><ul><li>School of Journalism and Mass Communication </li></ul><ul><li>University of Kansas </li></ul><ul><li>[email_address] </li></ul>Understanding Financial Statements
  4. 4. Schedule for Week <ul><li>Day 1: Introduction to financial statements </li></ul><ul><li>Day 2: Income statement </li></ul><ul><li>Day 3: Balance sheet </li></ul><ul><li>Day 4: Cash flows </li></ul><ul><li>Day 5: Beyond the basics </li></ul>Understanding Financial Statements
  5. 5. <ul><li>The Income Statement </li></ul>Understanding Financial Statements
  6. 6. Accrual vs. Cash <ul><li>Accrual method </li></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><li>Cash method </li></ul><ul><ul><li>Statement of Cash Flows </li></ul></ul>Understanding Financial Statements
  7. 7. Accrual Method <ul><li>Records revenues as soon as the “sale” occurs </li></ul><ul><li>Records expenses as soon as the bill is received </li></ul><ul><li>IE, transactions enter the financial records when they occur, not when cash changes hands </li></ul><ul><li>Accrual method, therefore, shows “scores,” not real spendable dollars </li></ul>Understanding Financial Statements
  8. 8. About These Numbers: They’re Squishy <ul><li>Goods will not necessarily be paid for </li></ul><ul><li>Goods are not necessarily going to be kept </li></ul><ul><li>Inventory might be out of date, obsolete or unsellable </li></ul><ul><li>Status of some inventory may be uncertain </li></ul><ul><li>Intangible assets are estimates </li></ul>Understanding Financial Statements
  9. 9. About These Numbers: They’re Squishy (cont.) <ul><li>Machinery or other fixed assets might be obsolete or falling apart long before the so-called useful life is up </li></ul><ul><li>Goodwill </li></ul><ul><li>Impairment </li></ul><ul><li>Bottom line: In many ways, statements are a collection of estimates. </li></ul>Understanding Financial Statements
  10. 10. Because They’re Squishy <ul><li>You need to know the rules and assumptions used to create the numbers </li></ul>Understanding Financial Statements
  11. 11. Income Statement or ... <ul><li>Statement of earnings </li></ul><ul><li>Statement of operations </li></ul><ul><li>Statement of income and comprehensive income </li></ul>Understanding Financial Statements
  12. 12. Income Statement <ul><li>Covers a period of time, typically a year or quarter </li></ul><ul><li>Reports income from ongoing activities </li></ul><ul><li>Reports income from activities beyond management’s control (comprehensive income) </li></ul><ul><li>Involves estimates </li></ul>Understanding Financial Statements
  13. 13. Basic Income Statement <ul><li>Sales or revenues </li></ul><ul><li>Expenses </li></ul><ul><li>Taxes </li></ul><ul><li>Net income or profit </li></ul>Understanding Financial Statements
  14. 14. Income Statement <ul><li>Sales or revenues </li></ul><ul><li>Cost of goods sold </li></ul><ul><li>Gross profit </li></ul><ul><li>Operating expenses </li></ul><ul><ul><li>Sales, general and administrative </li></ul></ul><ul><ul><li>Depreciation, amortization </li></ul></ul><ul><li>Operating profit </li></ul><ul><li>Other income/expenses </li></ul><ul><li>Interest </li></ul><ul><li>Income taxes </li></ul><ul><li>Net income or profit </li></ul>Understanding Financial Statements
  15. 15. Cost of Goods Sold <ul><li>Expenses incurred in the cost of manufacturing or creating or acquiring the product the company sells. </li></ul>Understanding Financial Statements
  16. 16. Cost of Goods Sold <ul><li>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. </li></ul>Understanding Financial Statements
  17. 17. Cost of Goods Sold <ul><li>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. </li></ul><ul><li>Service business: Since it doesn’t make or sell a product per se, typically find a modest CGS. </li></ul>Understanding Financial Statements
  18. 18. SGA <ul><li>Includes office expenses, accounting, shipping department, advertising, R&D, depreciation and other expenses that can’t be directly attributed to particular items for sale. </li></ul><ul><li>Often includes depreciation and amortization. </li></ul>Understanding Financial Statements
  19. 19. Other Income/Expenses <ul><li>Discontinued items </li></ul><ul><li>Unusual/extraordinary items </li></ul><ul><li>Changes in accounting principle </li></ul><ul><li>Impairment charge </li></ul><ul><li>Sale of investment </li></ul><ul><li>Minority interest </li></ul>Understanding Financial Statements
  20. 20. Thinking Inside the Box <ul><li>Revenues </li></ul><ul><li>Minus cost of goods sold </li></ul><ul><li>Equals gross profit </li></ul><ul><li>Minus operating expenses </li></ul><ul><li>Equals operating profit </li></ul><ul><li>Minus or plus other expenses/income </li></ul><ul><li>Minus or plus interest expenses/income </li></ul><ul><li>Minus income taxes </li></ul><ul><li>Net income </li></ul>Understanding Financial Statements
  21. 21. Inside the Box Earnings <ul><li>Sales or revenues </li></ul><ul><li>Cost of goods sold </li></ul><ul><li>Gross profit </li></ul><ul><li>Operating expenses </li></ul><ul><ul><li>Sales, general and administrative </li></ul></ul><ul><ul><li>Depreciation, amortization </li></ul></ul><ul><li>Operating profit </li></ul>Understanding Financial Statements
  22. 22. Earnings Per Share <ul><li>Basic earnings per share (Bloomberg) </li></ul><ul><li>Diluted earnings per share (Wall Street Journal, fully diluted) </li></ul>Understanding Financial Statements
  23. 23. Pro Forma Results <ul><li>Expenses against earnings are not standardized across an industry </li></ul><ul><li>Selectively defined earnings </li></ul><ul><li>Common pro forma: EBITDA </li></ul><ul><li>Recommendation: GAAP results should precede pro forma results in earnings releases </li></ul><ul><li>Headlines should show GAAP earnings </li></ul>Understanding Financial Statements
  24. 24. Pro Forma Results <ul><li>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” </li></ul><ul><li>Pro forma has value for many companies </li></ul><ul><li>“ As a matter of form” </li></ul>Understanding Financial Statements