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 http://businessjournalism.org.TRANSCRIPT
Understanding Financial Statements
Online SeminarDay 2
No. 10, 2009
Understanding Financial Statements2
An Online Seminar Presented By
The Donald W. Reynolds National Center
For Business Journalism
At Arizona State University
Understanding Financial Statements3
Presented By
James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communication University of Kansas [email protected]
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 Statements4
The Income Statement
Understanding Financial Statements5
Accrual vs. Cash Accrual method
Income Statement Balance Sheet
Cash method Statement of Cash Flows
Understanding Financial Statements6
Understanding Financial Statements7
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 Statements8
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kept Inventory might be out of date, obsolete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 Statements9
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 Statements10
Because They’re Squishy You need to know the rules and
assumptions used to create the numbers
Understanding Financial Statements11
Income Statement or ... Statement of earnings Statement of operations Statement of income and
comprehensive income
Understanding Financial Statements12
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 Statements13
Basic Income Statement Sales or revenues Expenses Taxes Net income or profit
Understanding Financial Statements14
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 Statements15
Cost of Goods Sold Expenses incurred in the cost of
manufacturing or creating or acquiring the product the company sells.
Understanding Financial Statements16
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 Statements17
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 Statements18
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 Statements19
Other Income/Expenses Discontinued items Unusual/extraordinary items Changes in accounting principle Impairment charge Sale of investment Minority interest
Understanding Financial Statements20
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 Statements21
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 Statements22
Earnings Per Share Basic earnings per share
(Bloomberg) Diluted earnings per share (Wall
Street Journal, fully diluted)
Understanding Financial Statements23
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 Statements24
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”