Workshop 2: Financial Accounting

Transcription

1 Workshop 2: Financial Accounting Agenda Understanding a Company Accounting Basics Income Statement Balance Sheet Statement of Cash Flow Footnotes 1

2 Understanding a company Know the industry (macro factors) Know the business (how does it make money) Then start to look at financials Company Filings ( Thomson Research 10K Filed annually, audited, best place for info 10Q Filed quarterly, unaudited, updates financials each quarter 8K Significant event description Get news ( Factiva The more you know about the qualitative factors driving the company, the easier it is to understand the financial statements Accounting Basics Generally Accepted Accounting Principles (GAAP) guide the financial reporting in the U.S. GAAP is based on Accrual accounting matching the timing of revenue to the expenses associated with it Cash accounting (like what individuals use) focuses on managing when cash is received, and paid out Because of the differences between the two, some information in financial statements doesn t actually reflect real transactions Depreciation, Amortization, Accrued Expenses, Unearned Revenue 2

3 Income Statement Tracks a company s sales, expenses, and profits in a given time period Beware of line items such as Other. Look to footnotes for guidance. Usually is a non-operating item Sales (Revenue) less: Cost of Goods Sold (COGS) (should exclude: D&A) less: Selling, General & Administrative expenses (SG&A) Earnings Before Interest Taxes Depreciation and Ammortization (EBITDA) (Also Gross Profit) less: Depreciation & Amortization Earnings Before Interest and Taxes (EBIT) (Also called Operating Income) less: Interest Earnings Before Taxes less: Taxes Earnings (Net Income) Income Statement Analysis It is hard to gain insight from absolute numbers, instead look at the line items as a percentage of sales (known as Common Size financials or margin analysis) Then look at trends over time. Is COGS/Sales increasing with time or decreasing? SGA? Sales/Sales 100.0% 100.0% 100.0% 100.0% 100.0% COGS/Sales 67.0% 68.0% 69.0% 66.0% 71.0% SGA/Sales 12.0% 11.0% 10.7% 10.0% 10.1% EBITDA/Sales (Operating Income Margin) 21.0% 21.0% 20.3% 24.0% 18.9% D&A/CapEx* 50.0% 49.0% 45.0% 63.0% 55.0% EBIT/Sales 15.0% 15.0% 16.0% 17.0% 15.5% Taxes/EBT* 40.0% 41.0% 41.5% 42.0% 39.7% Earnings/Sales (Profit Margin) 7.0% 8.0% 6.9% 8.2% 8.3% 3

4 Balance Sheet Shows the company s financial position at a given point in time Most items are recorded at their historical value Assets = Something that will generate future revenue Liabilities = A future obligation the company must fulfill Owner s Equity = Ownership interest in the company Assets = Liabilities + Owner s Equity Balance Sheet Assets Cash Inventory Accounts Receivables Prepaid Expenses Current Assets Plant Property & Equipment (PP&E) Intangible Assets Total Assets Liabilities and Owners' Equity Accounts Payable Notes Payable Accrued Expenses Total Current Liabilites Long Term Debt Deferred Tax Liability Total Liabilities Common Stock Retained Earnings Total Sharesholders' Equity Must Always Match 4

5 Balance Sheet Analysis Central issue: How efficient is the firm using its capital? Does it take $2 of assets to make $1 of profit? Or does it take $3 of assets to make $1 of income? Return on Assets = Profit Margin x Asset Turnover Earnings / Sales Sales / Total Assets COGS / Sales SG&A / Sales Sales / Inventory (Inventory Turnover) Sales / Accounts Receivables (A/R Turnover) Sales / PPE Fixed Asset Turnover Statement of Cash Flows Shows the inflows and outflows of cash Contains three basic parts Cash Flows from Operations = cash generated in the normal course of business Cash Flows from Investing = Cash used/generated from the purchase and sale of PP&E, acquisitions of other firms Cash Flows from Financing = Cash used/generated from issuing stock/bonds, paying off bonds, repurchasing stock 5

6 Statement of Cash Flows Analysis Key issues: How does the company generate cash? Is cash flow growing or declining? Look to see if CF from Operations is tracking sales growth In a growing company you will often see the majority of cash generated in financing activities and used in investing activities In an established company, the majority of cash generated should come from operations Again, look at trends over time For finance purposes, this is where you obtain the Depreciation & Amortization numbers and the Capital Expenditure number Footnotes Footnotes help to clarify information in the statements Pay particular attention to footnotes on: Tax Contingent liabilities Debt 6