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Introduction to Financial Statements Donald S. Appleby

Introduction to Financial Statements Donald S. Appleby






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    Introduction to Financial Statements Donald S. Appleby Introduction to Financial Statements Donald S. Appleby Presentation Transcript

    • Introduction to Financial Statements Donald S. Appleby Adjunct Assistant Professor Dept. of Electrical and Computer Engineering The University of Alabama at Birmingham © Donald S. Appleby, 2009. All rights reserved.
    • Why Analyze Statements?  Management  To evaluate business performance  To compare performance with others  To discern trends  To make decisions  Creditors  To assess credit worthiness/risk  Investors, analysts, unions, government  For general information 2
    • The Financial Statements  Preliminary Concepts  Read the footnotes that accompany the statements  Verify that the statements were independently audited  Look for qualified opinions from the accountants expressing areas of concern  Understand the accounting principles being used  Ex. LIFO and FIFO 3
    • 1 - The Balance Sheet 4
    • The Balance Sheet  Also called the Statement of Financial Position  Reports financial position at a point in time  Lists assets, liabilities, and owners equity  The Accounting Equation  Assets = Liabilities + Owners Equity 5
    • The Balance Sheet  Look at an example of a comparative balance sheet  Accounts are listed in order of decreasing liquidity  Ease of conversion to cash  Grouped as  Current  duration of a year or less  Non-current  duration over a year 6
    • Assets  Current  Long-term 7
    • Current Assets  Cash  Marketable Securities  Accounts Receivable (less allowance for bad debts)  Inventory (at lower of cost or market)  Raw materials  Work in process  Finished goods 8
    • Long-Term Assets  Investments and Intangible Assets  Patents, trademarks, copyrights  Goodwill  Ownership of other companies, joint ventures  Fixed Assets  Property  Plant  Equipment 9
    • Net Book Value  Gross book value  Less: Accumulated Depreciation  Equals: Net Book Value  Gross book value is a record of the original price paid for the asset.  Accumulated depreciation is the total depreciation expense recorded against the asset. 10
    • Depreciation Methods  Always seek professional guidance  Modified Accelerated Cost Recovery System (MACRS)  Accelerated Cost Recovery System (ACRS)  Terms you may encounter  Straight line  Accelerated  Double declining balance  Sum of the years digits 11
    • Liabilities  Current  Long-term 12
    • Current Liabilities  Accounts Payable  Notes Payable  Current-Portion of Long-Term Debt 13
    • Long-Term Liabilities  Long-Term Debt 14
    • Stockholders’ Equity  Preferred Stock  Receives dividends (but not an obligation)  Less risk than common stock (liquidation priority)  Not considered owners; generally don’t vote  Common Stock  Ownership of the business  Amount shown is historical not market value  Paid-In Capital  Capital paid-in in excess of par value of stock  Retained Earnings  Total of all profits that were re-invested in the business rather than distributed as dividends 15
    • 2 - The Income Statement 16
    • Income Statement  Also called  Statement of Earnings  Profit and Loss Statement  Objective is to match expenses to revenue for a given period of time  Revenue – Expenses = Profit 17
    • Components: Gross Profit  Revenue (or sales)  Less: Cost of Goods Sold …directly allocated cost of production  Gross Profit (or gross margin)  Cost of Good Sold  Raw materials  Purchased components  Direct labor  Operation and repair of manufacturing equipment  Other manufacturing expenses such as utilities, maintenance of the manufacturing facility 18
    • Components: Operating Income  Gross Profit  Less: Operating Expenses …not directly allocated to COGS  General and administrative expenses  Depreciation (a non-cash expense)  Other expenses  Operating Income (excludes investment income, interest, and taxes)  General and administrative expenses  Staff expenses, executive salaries  Selling expenses, promotions, advertising  R&D 19
    • Putting It Together  Revenue  Less: COGS  Equals: Gross Profit  Less: Operating Expenses  Equals: Operating Income  Operating income is focused on the profit being generated by operations. It excludes, or filters out, the effects of interest and taxes. See EBIT. 20
    • Earnings  EBIT: Earnings Before Interest and Taxes  EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization  Focuses more on cash flow / cash management  Depreciation and amortization are non-cash expenses 21
    • 3 – Statement of Cash Flows 22
    • Statement of Cash Flows  FASB requires a report on the firm’s cash flows for the accounting period  Statement is also called  Sources and Uses of Funds  Need to understand Working Capital  “Working capital” refers to the funds used to carry out the daily operations of the business  Invested in inventory  Invested in A/R 23
    • Sources and Uses of Cash  Increase* of an asset is a use of cash  So decrease of an asset is a source of cash  Increase of a liability is a source of cash  So decrease of a liability is a use of cash  Comments  Depreciation reflects a decrease in the value of an asset, so it is a source of cash  Think of net worth as a “liability”  An increase in net income increases net worth and is thus a source of cash *Increase and decrease refer to changes from the beginning of the accounting period to the end of the accounting period. 24
    • Comments regarding cash  Accrual method of recognizing income  Effect of lags in collecting cash  Effect of depreciation on cash flow  More about cash later 25