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How to Read a
Financial Statement
National Press FoundationApril 2011
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Why This Matters
S&L Crisis = FIRREA Enron, WorldCom = SOX
2007-2009 Financial Crisis = TARP
Understanding Financial StatementsAllows You to Ask Smarter Questions,
Engage Management in Higher LevelDialogue and Write More Powerful Stories
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Rules of the Game
Generally Accepted Accounting Principles Financial Accounting Standards Board
(FASB), Norwalk, Conn. est. 1973 sets
U.S. GAAP 1934 Securities Exchange Act requires
publicly traded companies to file audited
financial reports. Enforced and regulated by the Securities
and Exchange Commission (SEC)
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Why it really is a Game
Disclosure in a competitive environment Pressure to manipulate financial
statements
Keeping up with high growthindustries/markets
Investor Pressure
Short-term, quarterly focus on gains
Dependence on share price for financing
Management greed/compensation
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Tools for journalistswhere to find information
Annual Report to Shareholders 10-K annual reports
10-Q quarterly reports
8-K material event filing Proxy statements
Earnings calls
Analyst reports Form 144 - Insider transactions
Annual meeting
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10-K Annual Report
Income Statement Balance Sheet
Management Discussion and Analysis
Structure of Industry and Competition
Footnotes
Auditors statement
Statement of Cash Flows
Liquidity Position
Contingencies
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10-Q Quarterly Report
Quarterly earnings statement Due within 45 days
Unaudited
Compare to the press release
Focus on income from continuingoperations before transactions: What EPS
would have been
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8-K Filing material events
Notifies investors of material events Hire, fire, departure of top officers
Acquisition or sale
Change in control
Plant shutdowns, layoffs
Subsidiary sales, acquisitions
Triggering events (loan obligations)
Bonds, stock sales, financing
Lawsuits, bankruptcies etc.
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Proxy statements
Relates to the election of boards ofdirectors at annual meeting
Allows shareholders to vote by proxy,
i.e.; mail, on issue facing the company Includes #s on management
compensations, stock options.
Auditor changes Insights into CEO incentives and board
relationships
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Income Statement (Profit and Loss,P&L, or the Bottom Line)
Gross Revenue- Cost of sales, administration
- Depreciation, amortization
= Operating profit
+ Other revenues other expenses
= Taxable income
- Income taxes
= Net income
- Dividends = profits reinvested
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Balance Sheet
Assets - Liabilities = Equity
Liabilities + Equity = Assets?
Equity / # shares outstanding = book valueper share
Compare to stock price; What is marketsaying?
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Cash Flow real money vs. accrual
Income from operations (adjust for) +/- non-cash expenses/revenue
+/- changes in working capital
= Net cash from operations
+/- Cash from investing activity
+/- Cash from financing
= Net Cash flow
Change in cash = beginning - ending cash
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Getting Past the Snapshot Effect
Financial reports reflect financial conditionon four days a year.
Balance sheets expand or contract during
the time in between reporting periods. Revenue recognition varies
Use spreadsheet to stack historic data for
long-term perspective Look for economic/macro trends
Access management strategy vs context
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Ratio Analysis/Monetary Measures
ROE = Return on Equity, income/equity ROA = Return on Assets, income/assets
EPS = Earnings Per Share, $$s/# shares
Debt Ratio = Debt/Assets
COGS = Cost Goods Sold, Cost Sales
EBITDA = Earnings before interest, taxes,depreciation and amortization
Compare to other competitors and industryaverages to benchmark performance
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How to Put it All Together
What is the companys business, mission? How much cash does it really make?
What are its resources?
Where is it getting financing from?
Where is it investing in its business?
Is it profitable vs industry peers?
What do the accounting footnotes say?
What are the key ratios?
What does management say?
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How to Read a
Financial Statement
National Press FoundationApril 2011