Вы находитесь на странице: 1из 63

Course Notes

Reading Financial Statements

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Advance Your Career

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Reading Financial Statements

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Reading Financial Statements

Course Objectives:
Reading and understanding company annual reports, and sets of financial
statements

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Understanding the Balance Sheet

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Three Key Financial Statements

1. Balance sheet

2. Income statement

3. Statement of cash flows

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Balance Sheet

Represents the company at a point in time

Assets, liabilities and equity

Helps in determining the financial stature and strength of the company

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Income Statement

Represents the company over a period of time

Revenue, expenses and profit

Demonstrates profitability

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Statement Of Cash Flows

Acts like a bank statement

Reconciles the opening cash balance with the closing cash balance

Connects the income statement to the balance sheet

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Statement Of Cash Flows

Divided into three specific cash flow types

A useful financial statement to understand where cash is being generated


and used in the business

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Simplified Balance Sheet

May be presented in a horizontal or vertical format

Displays current and non-current accounts

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Current Vs Non-current

Assets

Current: will be redeemed in a year or less

Non-current: to be held for longer than a year

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Current VS NON-CURRENT

Liabilities

Current: amounts due to a creditor in a year or less

Non-current: obligations due for terms longer than a year

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Microsoft Balance Sheet Demonstration

Includes Assets, Liabilities and Equity

Microsoft statement is in millions of dollars

Always has a notation if the numbers are not reported as whole dollars

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Microsoft Balance Sheet Demonstration

2010 and 2009 accounts are reported to provide comparative results

See accompanying notes at the bottom

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Microsoft Balance Sheet Demonstration

Accounts making up the balance sheet

Cash Accounts payable


Accounts receivable Debts
Inventories Common stock
Property and Equipment Retained deficit

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Investments

Investments are held to take advantage of idle cash

Alternatively, investments help accumulate cash

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Investments

Investments can be:

Internal or external

Short term or long term

Debt or equity

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Deferred Income Tax

Often seen on financial statements

Due to difference between tax and accounting rules

2017, all rights reserved. https://www.corporatefinanceinstitute.com


What Is Goodwill?

The difference between purchase price and fair value

Recorded as non-current asset

Remeasured every year

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Intangible Assets

Assets that generate revenue, but without physical substance

Examples are trademarks, patents and copyrights

Recorded as non-current assets

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Unearned Revenue

Arises when a company is paid for an undelivered good or service

Examples are licenses and subscriptions

The balance is shown as liability

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Commitments

Future obligations that a company agrees to

Examples are new buildings, building improvements and


leasehold improvements

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Contingencies

Possibilities that are not 100% certain

Example: Lawsuit

Accounting rules are conservative; contingent losses are recorded,


while contingent gains are harder to allow

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Contingencies

The liability must be recorded if:

1. A future event will confirm impairment of an asset or a liability


existed as at balance sheet date

2. The loss amount can be reasonably estimated

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Common Vs Preferred Shares

Common shares

Residual claim to assets

Voting rights

Partake in profits

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Common Vs Preferred Shares

Preferred shares

Fixed dividend

Paid before common shares

Has a par value

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Authorized Vs Outstanding Share Capital

Authorized shares are the maximum saleable shares

Outstanding shares are the total shares held by investors currently

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Contributed Surplus

Excess value received above par value of a share

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Other Comprehensive Income

Gains and losses outside of main operations

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Balance Sheet Component Matching Exercise

Open the balance sheet component matching exercise and


balance sheet component matching solution for results

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Statement Of Shareholders Equity

Itemizes equity transactions for the period

This consists of stock and retained earnings

2017, all rights reserved. https://www.corporatefinanceinstitute.com


The Full Disclosure Principle

Notes are provided below financial statements for additional


information

Notes allow for stronger judgment by readers

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Three Key Financial Statement Notes

1. Significant accounting policies

2. Direct information

3. Indirect information

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Significant Accounting Policies

Company accounting principles

Valuation techniques

Financial instruments

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Significant Accounting Policies

Revenue recognition

Depreciation methods

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Direct Information

Breakdown of investment types


Debt
Financial assets

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Indirect Information

Commitments

Contingencies

Stock based compensation plans

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Noteworthy exercise

Open the Noteworthy exercise and Noteworthy solution for


results.

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Understanding The Income Statement And Cash
Flow

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Three key financial statements

1. Balance sheet

2. Income statement

3. Statement of cash flows

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Single Step Vs Multi-step Income Statements

Single step
Groups revenues vs expenses in separate sections
Profitability/net income is shown at the very end

Multi step
More commonly seen
Displays revenues then expenses in a logical order

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Cost Of Sales

The direct costs of the items sold or services provided

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Selling, General And Administrative

Varied expense items

Expenses outside of cost of goods sold

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Gains And Losses

Related to sale, gains and losses of investments

Alternatively, related to exchange rate translations

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Microsoft Income Statement Exercise

Open the Microsoft income statement exercise and Microsoft


income statement solution for results

2017, all rights reserved. https://www.corporatefinanceinstitute.com


The Cash Flow Statement

Inflows and outflows of cash

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Cash Flow Activities

Sorted by:

Operating activities

Investing activities

Financing activities

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Operating Activities

Main operations

Revenues collected and expenses paid

If indirect method, add back non-cash expenses

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Investing Activities

Long-term assets needed for the business

Companies must reinvest cash back into the business

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Financing Activities

Equity or debt transactions

The method by which a company raises funds

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Direct Method Vs Indirect Method

Statement of cash flows can be prepared using direct or indirect


method

CFO is derived differently; CFF and CFI are the same

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Direct Method

Begins with cash transactions

Classifies into receipts from customers, and payments to suppliers

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Indirect Method

Begins with net income

Non-cash and non-CFO transactions are added back to arrive at CFO

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Key Elements In A Cash Flow Statement

Net cash

Changes in working capital

Capital expenditure

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Microsoft Cash Flow Statement Exercise

Open the Microsoft cash flow statement exercise and Microsoft


cash flow statement solution for results.

2017, all rights reserved. https://www.corporatefinanceinstitute.com


The Benefits Of An Annual Report

Mixture of financial and non-financial information

Hear from the company itself

Management may provide explanations for their strategy

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Contents Of Annual Report

Letter to shareholders

Description of business

MD&A

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Contents Of Annual Report

Reporting on internal controls

Audit report

Three Financial Statements

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Management Discussion And Analysis

Explanation for:

Past performance
Financial highlights
Future strategic direction

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Management discussion and analysis

Lists future actions to be taken

Identifies the key risks facing the organization

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Microsoft reporting challenge exercise

Open the Microsoft reporting challenge exercise and Microsoft


reporting challenge solution for results

2017, all rights reserved. https://www.corporatefinanceinstitute.com


Advance Your Career

2017, all rights reserved. https://www.corporatefinanceinstitute.com