Unlocking Financial Statements (2012) - Day 2 by Jimmy Gentry


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Jimmy Gentry presents Day Two 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 2 by Jimmy Gentry

  1. 1. UnlockingFinancial Statements Day 2
  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. The Income Statement Understanding Financial Statements 3
  4. 4. Income Statement Understanding Financial Statements 4
  5. 5. Accrual vs. Cash Accrual method  Income Statement  Balance Sheet Cash method  Statement of Cash Flows Understanding Financial Statements 5
  6. 6. Accrual Method Records revenues as soon as the “sale” occurs Records expenses as soon as the bill is received IE, transactions enter the financial records when they occur, not when cash changes hands Accrual method, therefore, shows “scores,” not real spendable dollars Understanding Financial Statements 6
  7. 7. About These Numbers:They’re Squishy Goods will not necessarily be paid for Goods are not necessarily going to be kept Inventory might be out of date, obsolete or unsellable Status of some inventory may be uncertain Intangible assets are estimates Understanding Financial Statements 7
  8. 8. About These Numbers:They’re Squishy (cont.) Machinery or other fixed assets might be obsolete or falling apart long before the so-called useful life is up Goodwill Impairment Bottom line: In many ways, statements are a collection of estimates. Understanding Financial Statements 8
  9. 9. Because They’re Squishy You need to know the rules and assumptions used to create the numbers Understanding Financial Statements 9
  10. 10. Income Statement or ... Statement of earnings Statement of operations Statement of income and comprehensive income Understanding Financial Statements 10
  11. 11. Income Statement Covers a period of time, typically a year or quarter Reports income from ongoing activities Reports income from activities beyond management’s control (comprehensive income) Involves estimates Understanding Financial Statements 11
  12. 12. Basic Income Statement Sales or revenues Expenses Taxes Net income or profit Understanding Financial Statements 12
  13. 13. Income Statement Sales or revenues Cost of goods sold Gross profit Operating expenses  Sales, general and administrative  Depreciation, amortization Operating profit Other income/expenses Interest Income taxes Net income or profit Understanding Financial Statements 13
  14. 14. Cost of Goods Sold Expenses incurred in the cost of manufacturing or creating or acquiring the product the company sells. Understanding Financial Statements 14
  15. 15. Cost of Goods Sold 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. Understanding Financial Statements 15
  16. 16. Cost of Goods Sold 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. Service business: Since it doesn’t make or sell a product per se, typically find a modest CGS. Understanding Financial Statements 16
  17. 17. SGA Includes office expenses, accounting, shipping department, advertising, R&D, depreciation and other expenses that can’t be directly attributed to particular items for sale. Often includes depreciation and amortization. Understanding Financial Statements 17
  18. 18. Other Income/Expenses Discontinued items Unusual/extraordinary items Changes in accounting principle Impairment charge Sale of investment Minority interest Understanding Financial Statements 18
  19. 19. Thinking Inside the Box  Revenues  Minus cost of goods sold  Equals gross profit  Minus operating expenses  Equals operating profit  Minus or plus other expenses/income  Minus or plus interest expenses/income  Minus income taxes  Net income Understanding Financial Statements 19
  20. 20. Inside the Box Earnings Sales or revenues Cost of goods sold Gross profit Operating expenses  Sales, general and administrative  Depreciation, amortization Operating profit Understanding Financial Statements 20
  21. 21. Earnings Per Share Basic earnings per share (Bloomberg) Diluted earnings per share (Wall Street Journal, fully diluted) Understanding Financial Statements 21
  22. 22. Pro Forma Results Expenses against earnings are not standardized across an industry Selectively defined earnings Common pro forma: EBITDA Recommendation: GAAP results should precede pro forma results in earnings releases Headlines should show GAAP earnings Understanding Financial Statements 22
  23. 23. Pro Forma Results 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” Pro forma has value for many companies “As a matter of form” Understanding Financial Statements 23
  24. 24. 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 24