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.

1. Unlocking
Financial Statements
Day 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. The Income Statement
Understanding Financial Statements
3

4. Income Statement
Understanding Financial Statements
4

5. Accrual vs. Cash
 Accrual method
 Income Statement
 Balance Sheet
 Cash method
 Statement of Cash Flows
Understanding Financial Statements
5

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. 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 Inventory might be out of date, obsolete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. 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. Because They’re Squishy
 You need to know
the rules and
assumptions used to
create the numbers
Understanding Financial Statements
9

10. Income Statement or ...
 Statement of earnings
 Statement of operations
 Statement of income and
comprehensive income
Understanding Financial Statements
10

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. Basic Income Statement
 Sales or revenues
 Expenses
 Taxes
 Net income or profit
Understanding Financial Statements
12

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. 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. 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. 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. 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. Other Income/Expenses
 Discontinued items
 Unusual/extraordinary items
 Changes in accounting principle
 Impairment charge
 Sale of investment
 Minority interest
Understanding Financial Statements
18

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. 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. Earnings Per Share
 Basic earnings per
share (Bloomberg)
 Diluted earnings per
share (Wall Street
Journal, fully diluted)
Understanding Financial Statements
21

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. 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. 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