Unlocking Financial Statements (2012) - Day 1 by Jimmy Gentry

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Jimmy Gentry presents Day One of "Unlocking Financial Statements," a free, weeklong webinar series hosted by the Donald W. Reynolds National Center for Business Journalism.

This training covers income statements, balance sheets, cash flows and tips for finding stories in corporate filings.

For more information about free training for business journalists, please visit businessjournalism.org.

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Unlocking Financial Statements (2012) - Day 1 by Jimmy Gentry

  1. 1. UnlockingFinancial Statements Day 1
  2. 2. 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 Statements 2
  3. 3. IntroductionTo Financial Statements Understanding Financial Statements 3
  4. 4. Types of Companies Public Private  Financial statements conforming to public company statements Non-profits Understanding Financial Statements 4
  5. 5. Important Terms Unaudited Audited Accountants Certified Public Accountants (CPAs) GAAP, FASB, AICPA, PCAOB Understanding Financial Statements 5
  6. 6. Sarbanes-Oxley Act of 2002 Response to abuses with Enron and WorldCom as catalysts New responsibilities and resources for SEC Created PCAOB Major emphasis on “internal controls” More disclosure for public companies Understanding Financial Statements 6
  7. 7. Sarbanes-Oxley Act Analysts must disclose potential conflicts of interest Limited types of services accounting firms can provide to public company clients CEO, CFO attest to accuracy, completeness, fairness of financial statements Rigorous penalties for fraud, other misdeeds Understanding Financial Statements 7
  8. 8. Public Company AccountingOversight Board Created by SOX to oversee accounting SEC appoints members to five-year terms Five full-time members including a chairman Two must be or have been CPAs All members must be “financially literate” Began operating May 2003 Understanding Financial Statements 8
  9. 9. Key SEC Documents 10-K 10-Q 8-K Proxy statement Prospectus Understanding Financial Statements 9
  10. 10. Annual Report (or 10-K)Strategy Auditor’s report Management’s discussion and analysis Understanding Financial Statements 10
  11. 11. Annual Report (or 10-K)Strategy (cont.) Financial statements and footnotes Management’s letter if annual report Understanding Financial Statements 11
  12. 12. Basic Auditor’s Report Independent auditor’s opinion on whether financial statements are presented fairly in all material respects, in accordance with GAAP: We looked at these statements They’re management’s responsibility; we’re just here to express our opinion We followed the rules in our audits and here’s what an audit involves In our opinion, the statements fairly present the company’s position Understanding Financial Statements 12
  13. 13. Understanding Financial Statements 13
  14. 14. Auditor’s Report by Category Clean or Unqualified Qualified Disclaimer Adverse Understanding Financial Statements 14
  15. 15. New Auditor’s Report Combines traditional report with internal controls requirement of Sarbanes-Oxley Act Understanding Financial Statements 15
  16. 16. MD&A Must read it Often a source of good information and insights Densely written SEC says it wants greater transparency Understanding Financial Statements 16
  17. 17. Goal of Accounting Record, classify and report financial transactions. To provide managers across the organization with information that facilitates:  Control of activities and expenditure  Refinement of operational plans  Accountability  Reporting on project outcomes  Writing of bids for new funds Understanding Financial Statements 17
  18. 18. Goal of Finance Maximize shareholder wealth as reflected in market price of the stock Achieving this goal requires financial manager to focus on economic profit, not accounting profit Understanding Financial Statements 18
  19. 19. Financial Decisions Long-term investment decisions  Capital budgeting Long-term financing decisions  Capital structure Working capital management decisions  Net working capital Understanding Financial Statements 19
  20. 20. Financial Decisions Investing decisions: Types of assets firm wants to hold. Financing decisions: Acquisition of funds needed to support long-term investments. Understanding Financial Statements 20
  21. 21. Generally AcceptedAccounting Principles Guidelines based on theory and practice Evolved over time Procedures, concepts and standards Understanding Financial Statements 21
  22. 22. GAAP: Key Points Periodicity Going concern Economic entity Monetary unit Full disclosure Understanding Financial Statements 22
  23. 23. GAAP: Key Points Historical cost Revenue realization Consistency Materiality Industry practices Conservatism Understanding Financial Statements 23
  24. 24. Cash or Operating Cycle Cash Purchase inventory Produce product Sell product Cash Understanding Financial Statements 24
  25. 25. Cash or Operating Cycle(cont.) “Cash”  Cash  Receivables  Debt Inventory  Raw materials  Work in progress  Finished goods Understanding Financial Statements 25
  26. 26. Cash or Operating Cycle(cont.) Sell product  Accounts receivable  Cash Cash  Collect receivables as cash Pay off payables Start over Understanding Financial Statements 26
  27. 27. Presented by: James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas jgentry@ku.edu Understanding Financial Statements 27

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