Financial StatementsJason O’Bryan

30 January 2007

Financial Statements• Financial statements are released

quarterly (10-Q) and annually (10-K).• You can usually find them in the annual

report available on the company website, or from Yahoo! Finance.

• Financial reporting is required by the SEC. The rules are established by GAAP, Generally Accepted Accounting Principles.

Types of Statements• Balance Sheet

– Totals a company’s assets and liabilities.

• Income Statement– Reports on a company’s results of

operations, shows profit or loss.

• Cash Flow– Shows cash flows due to operating,

investing, and financing activities.

Balance Sheet• Statement of the book value of a

company.• Main parts:

– Assets– Liabilities– Stockholders’ Equity

• Important Equation:– Assets = Liabilities + Stockholders’ Equity

Assets• The most liquid assets are listed first.• Current Assets

– Assets expected to be converted to cash, sold, or consumed within 1 year or within the operating cycle.

– Cash, Short-term investments, Receivables, Inventory, Prepaid expenses

Assets• Long-term Investments

– Investments in securities such as bonds, common stock, or long-term notes.

– Investments in fixed assets that are not used in operations (e.g. land held for sale)

– Investments in special funds (e.g. pension)– Investments in subsidiaries or affiliated

companies.

Assets• Fixed Assets

– Tangible assets– PP&E (Property, Plant & Equipment)– Land, buildings, machinery, furniture, tools– Accumulated Depreciation

Assets• Intangible Assets

– Patents– Copyrights– Goodwill– Trademarks

Liabilities• Current Liabilities

– These are expected to be cleared within 1 year.

– Wages, accounts, taxes, accounts payable

• Long-term Liabilities– Long-term bonds, notes payable, leases,

pension obligations, product warranties

Shareholders’ Equity• The stockholders’ interest in all assets

after all liabilities are paid.– Equals Assets minus Liabilities

• Equity increases when the book value of the business increases.– Assets Increase– Liabilities Decrease– Profits are realized– New shares are issued

Income Statement• Shows the profit or loss over a period.• Has two main categories, revenues and

expenses.– Revenues total up everything that was earned.– Expenses total up everything that was spent.

• The difference is Net Income.

Income Statement• Typically categorized in 3 main

sections– Operating– Non-operating– Irregular items

Operating Section• Calculates Operating Income• Revenue

– Inflows of assets, usually cash from sale of goods or services.

• Expenses– COGS – amount products cost to produce– G&A – expenses to manage the business

(officer salaries, legal fees, utilities, supplies)– Selling – advertising, shipping, commission– Research & Development

Income Statement• Non-operating section

– Interest expensed and interest earned– Income tax– Any revenues or expenses not related to

the primary business operations.

• Irregular items– Discontinued operations– Extraordinary items (e.g. natural disasters)

Income Statement• Net Income = Operating Income –

Additional expenses• EBIT – Earnings before interest & taxes

– A measure of earning power from operations– Amount of cash available to pay off creditors

• EBITDA – depreciation & amortization– Good for looking at companies with large

amounts of fixed assets (which are subject to heavy depreciation charges)

Cash Flow Statement• Shows incoming and outgoing money

during a particular period.• Broken down into 3 categories

– Operating activities– Investing activities– Financing activities

Operating Activities• Production, sales, and delivery of the

company’s product as well as collecting payment from its customers.– Net Income from income statement– Depreciation– Working Capital– Deferred Tax

Investing Activities• Purchase or sale of long-term assets.

– Buying new land– Building a new factory– Purchasing machinery

Financing Activities• Cash flow from investors, such as

banks and shareholders– Dividends paid– Sale or purchase of stock– Bank loans, notes

Questions?