Unlocking Financial Statements - Day 5


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Jimmy Gentry presents "Unlocking Financial Statements - Day 5," a business journalism Webinar for the Donald W. Reynolds National Center for Business Journalism.

To learn more about free training for business journalists, please visit businessjournalism.org.

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Unlocking Financial Statements - Day 5

  1. 1. Unlocking Financial Statements <ul><ul><ul><ul><ul><li>Online Seminar </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Day 5 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>July 22, 2011 </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>Beyond the Basics </li></ul>Understanding Financial Statements
  6. 6. 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>Sales, general and administrative </li></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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. Balance Sheet <ul><li>It balances </li></ul><ul><li>Assets = Liabilities + Shareholders ’ Equity </li></ul>Understanding Financial Statements
  11. 11. Cash Flows <ul><li>From operations </li></ul><ul><li>From investing </li></ul><ul><li>From financing </li></ul>Understanding Financial Statements
  12. 12. Free Cash Flow <ul><li>Several ways to calculate it </li></ul><ul><li>Companies create their own models </li></ul><ul><li>Gross way to do it: </li></ul><ul><ul><li>Cash from operating activities </li></ul></ul><ul><ul><li>Minus capital expenditures </li></ul></ul><ul><ul><li>Equals free cash flow </li></ul></ul>Understanding Financial Statements
  13. 13. A Basic Look at the Numbers <ul><li>Look at changes in amounts year to year, especially revenues and expenses </li></ul><ul><li>Look at numbers that are significantly larger or smaller than the previous period </li></ul><ul><li>Look at the trend line for sales/revenues, operating income and net income. Calculate percentage change for each. </li></ul><ul><li>Look at the trend for cash flow </li></ul><ul><li>Look at the trend for free cash flow </li></ul><ul><li>Tie the numbers to the footnotes </li></ul>Understanding Financial Statements
  14. 14. The Next Step <ul><li>Calculate percentage change year-to-year or over several years … </li></ul><ul><li>Especially for large numbers that are significantly larger or smaller than the previous period … </li></ul><ul><li>Especially for sales/revenues, operating income, net income, cash and free cash. </li></ul>Understanding Financial Statements
  15. 15. <ul><li>Identify trends </li></ul><ul><li>Identify what causes changes in totals on financial statements </li></ul><ul><li>Easier to compare percentages than raw numbers </li></ul><ul><li>Easier to compare companies </li></ul><ul><li>Easier to compare companies with industry averages </li></ul>Common Size Understanding Financial Statements
  16. 16. Common Size Analysis <ul><li>For Income Statement, divide all entries by revenue </li></ul><ul><li>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) </li></ul>Understanding Financial Statements
  17. 17. Comparable Statements <ul><li>Often have to restructure Income Statement to the in-the-box format we discussed </li></ul><ul><li>Typical problems come from items we would consider Other Income/Expenses </li></ul>Understanding Financial Statements
  18. 18. Trends in Margins <ul><li>How have Cost of Goods Sold and Sales, General and Administrative changed? </li></ul><ul><li>What does that mean for Gross Margins and Operating Margins? </li></ul><ul><li>Value of using Basis Points </li></ul>Understanding Financial Statements
  19. 19. Ratio Analysis <ul><li>Takes your analysis to yet another level </li></ul><ul><li>Finance types especially fond of ratios </li></ul>Understanding Financial Statements
  20. 20. Common Size, Ratios <ul><li>These techniques let you drill below the surface and start developing a more complete picture of the company ’s performance </li></ul><ul><ul><li>Strengths </li></ul></ul><ul><ul><li>Weaknesses </li></ul></ul><ul><ul><li>Strategic effectiveness </li></ul></ul>Understanding Financial Statements