1. Financial Statements Economics 98 / 198 Fall 2007 Copyright 2007 Jason Lee

2. CURRENT EVENT / NEWS

3. Sanctions are “domestic” measures and/or penalties applied by one country on another with the purpose of controlling, prohibiting or restricting financial or trade activity of persons, entities and governments in order to achieve policy objectives.

4. WHO ISSUES SANCTIONS? Any country can impose unilateral sanctions on any other territory. They are referred to as DOMESTIC sanctions. United Nations (UN) Resolutions can result in sanctions. If you live in a UN member state you are likely to be subject to UN Sanctions. The European Union* (EU) also issues sanctions which are enforced by each EU member state * EU Member States: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom. In the United States sanctions are issued by the Office of Foreign Asset Control (OFAC)

5. SANCTIONS: Type & Scope Financial Sanctions  can freeze the funds or any kind of assets of a Specially Designated National (‘SDN’)  can prohibit funds being made available to an SDN  can restrict the availability of insurance coverage & activity (e.g. insurance prohibitions relating to Syria, Iran, Cuba & others) Trade Sanctions  Syria and Iran have broad trade sanctions against them, relating to exports of crude oil and petrochemicals from those countries. OFAC: Specially Designated Nationals http://www.ustreas.gov/offices/enforcement/ofac/sdn /index.shtml

6. Broad Sanctions  target entire countries or industries  For example: the oil and petroleum sanctions applicable to Iran and Syria Smart/Targeted Sanctions  target SDNs only  For example: asset freeze on the funds of Korea Mining Corp (North Korea) or Muhammad Gaddafi (son of Colonel Gaddafi) - both are SDNs SANCTIONS: Type & Scope

7. WHY IS THIS IMPORTANT TO ME? US citizen (wherever you are working) US permanent resident Non-US citizen doing business in or from the US (if you are on holiday picking up emails or making calls from the US) If you work for a US company or a subsidiary owned by a US parent company

8. SANCTIONED TERRITORIES Cuba * Cuba* Iran North Korea Sudan Syria - Afghanistan- Egypt- Rep. Guinea-Bissau - Belarus- Eritrea- Rep. of Guinea - Burma (Myanmar)- Federal Rep. of Yugoslavia & Serbia- Somalia - Congo, Democratic Rep. of - Iraq- Tunisia - Ivory Coast (Cote d’Ivoire)- Lebanon- Yemen - Democratic Rep. of Congo- Liberia- Zimbabwe * * * * * * * * * * * * * * * * * * *

9. SANCTIONED TERRITORIES Over time list will change as certain sanctions are lifted, or new countries become subject to sanctions. In addition, the scope of sanctions against these countries can change. SANCTIONSSANCTIONS SANCTIONSSANCTIONS sanctions imposed against Syria have become significantly broader in recent years sanctions against Burma have eased and mostly been lifted

10. LECTURE CONTENT

11. Today’s Lecture Financial Statements introduction – Income Statement – Balance Sheet – Cash Flow Statement – Earning Season Ratio Analysis

12. Accounting 101: Financial Statements

13. Reporting Financial Statements Public co. required to publish 10K and 10Q – 10K = Annual financial reports – 10Q = Quarterly financial reports Income Statement Balance Sheet Statement of Cash Flows Why do we care about these reports?

14. The Income Statement Shows how much a company earned or lost during that specific period Considered the most analyzed statement for investors Divulges into a company’s profitability IS THE COMPANY MAKING PROFIT?

15. Income Statements Generally, 3 Major Parts – Revenues – Expenses – Net Income Earnings Per Share (EPS) = Profits / Shares Outstanding Investors pay very close attention to profits (earnings) and revenue (sales) Income = Revenues - Expenses

16. Balance Sheet Summarizes company’s assets, liabilities, and shareholders’ equities at specific time Assets = Liabilities + Shareholder’s Equity How do we analyze this statement? We use ratios and changes in trends to analyze the information

17. Balance Sheet Assets – Current Assets: life span of 1 year or less – Non-Current assets Liabilities – Current Liabilities – Non-current liabilities Shareholder’s Equity – Common / Preferred Stock – Retained Earnings

18. Statement of Cash Flows Shows how much money coming in (inflows) and going out (outflows) – Cash flow from operations – Cash flow from investing – Cash flow from financing Shows if company having trouble with cash – Profitable companies can struggle cash flows. Why? Cash is king! Pays for bills and funds operations!

19. Earnings Season Companies release quarterly reports and annual reports – “Financial Report Cards” Stock analysts issue earnings estimate – Consensus earnings estimates Earnings surprise is a good thing – Meeting / beating / missing expectations – If below estimates, then stock usually head downwards fast!

21. Understanding Earnings http://finance.yahoo.com/q/ae?s=EBAY +Analyst+Estimates Actual earnings value is important, but so is the growth of these earnings Compare EPS / Revenue? – Do we compare them to last quarter? – Do we compare them to the same quarter last year?

22. EPS % Growth: Google Q2 2007 Source: MSN Money Stock Quotes EPS growth calculated comparing Q2 2007 to Q2 2006 Q2 2007EPS Growth 2007 Q2 EPS 2006 Q2 EPS $2.98 / sh $2.39 / sh =25%

23. Why do Investors Care About Earnings? Strong earnings or expectations of strong earnings drive stock prices. Why? – Potential for greater reinvestment, and greater earnings – Passing the money to shareholders in various forms (dividends, buybacks, etc.) Ultimately, earnings provide a return on the investment for shareholders

24. Ratio Analysis

25. Used to gain idea of valuation and financial performance Compared to competitors and historical values to gain understanding about company’s value – Is it undervalued? Overvalued? – How is it performing?

26. Profit Margins = net income / net sales (revenue) – Measures how much out of every dollar of sales a company actually keeps in earnings High profit margins indicates that management efficient at controlling costs – Increased earnings are good, but if costs are increasing faster than sales, leads to lower profit per sale Good sign if company has growing profit margins

27. Profit Margins: Example Company has a net income of $10 million from sales of $100 million, giving it a profit margin of 10% ($10 million/$100 million) If in the next year net income rose to $15 million on sales of $200 million. Would its profit margins be growing or diminishing? What does this mean?

28. Price to Earnings Ratio (P/E) P/E Ratio = Price per share / Earnings per share – Look at company’s earnings relative to its price Most basic valuation method of company – How do you we use it? Ex. If BIG OIL co. has P/E ratio of 15 and has solid fundamentals, and the industry average is 40, then the BIG OIL would be considered undervalued https://www.youtube.com/watch?v=TKk1xdTbOK0

29. Price to Earnings Ratio (P/E) Use as a guide, not a guarantee in your analysis Sometimes, there is a reason for high or low P/E ratios (understanding business and industry is important) – High P/E ratios: investors may be willing to pay more for less earnings because its expect higher growth rates in the future – Low P/E ratios: may seem like a bargain, but low ratio may signal questionable future prospects.

30. Return on Equity (ROE) = Net Income / Shareholder’s Equity – how much profit a company can generate with the money shareholders have invested – Is it a profit-making machine or an inefficient clunker? Useful for comparing profitability and efficiency of a company to other firms in same industry – can indicate whether a company is growing without pouring new capital into business Growing ROE also shows management making better use of money invested by shareholders

31. Return on Equity (ROE) PC Industry Example (Dell vs. Gateway vs. HP) Dell HP Gateway

32. Debt-to-Equity Ratios Debt / Equity Ratio = Total Liabilities / Shareholder’s Equity – Proportion of equity and debt to finance assets High ratio: aggressive debt, potential for higher earnings per share but at more risk – More volatile earnings and larger interest expenses Compare this similar companies Warren Buffet preferred to see lower ratio so that earnings growth is generated by investors rather than borrowed money

33. Google Example Percentage analysis- you want to see good percentage increases in ratio valuation. Decreases for debt levels. If you do not see this then you should start asking questions and figure out why this is not happening.

34. Reading Motley Fool. “Analyzing Stocks” Recommended: Investopedia. “Valuation” Read by Thursday! On my website@ https://bccbusinessstudies.wikispaces. com

35. Other Relevant Ratios Current Ratio Return on Assets Inventory Turnover Interest Coverage More on Ratio Analysis / Financial Statement Analysis: http://www.investopedia.com/university/ratios/ratios1.asp http://www.investopedia.com/university/financialstatements/ UGBA 102A: Introduction to Financial Accounting