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Presentation on theme: "How to read a FINANCIAL REPORT"— Presentation transcript:

1 How to read a FINANCIAL REPORT

2 Components of an Annual Report
Letter to Shareholders- gives a broad overview of the company’s business and financial performance Business Review- summarizes a company’s recent developments, trends and objectives at a business unit level Financial Review- presents a company’s performance in dollar terms

3 Financial Statements The financial statements within an Annual Report include: Balance Sheet- portrays the financial position of the company by showing what the company owns (ASSETS) and what it owes (LIABILITIES & OWNERS EQUITY) at any given time. Income Statement- shows how much the corporation earned or lost during a year. It matches the revenues earned from selling goods and services against all the costs incurred to operate the company. The difference is the Net Income or Net Loss for the period

4 Financial Statements Statement of changes in shareholders equity- identifies the increases or decreases in owners equity such as additions from Net Income less reductions due to dividends and new acquisitions. Statement of cash flows- identifies the change in the cash position of a company and the sources and uses of cash during the year.

5 Annual Report certification
Audit- an examination of a company’s financial statements CPA- Certified Public Accountants who review the company’s financial report and certify that they are accurate GAAP- Generally Accepted Accounting Principles or the rules that CPA’s follow to properly record the numbers within the financial statements.

6 Balance Sheet Assets=Liabilities and Owners Equity
Current Assets- include assets that can be converted into cash within one years time Cash and marketable securities- cash on hand and short term investments such as CD’s and Treasury bills Accounts Receivable- Money due from customers less an allowance for doubtful accounts. Inventory- this includes raw materials, work in process and finished goods stated at the lower of cost or market value Prepaid Expenses- Items such as Insurance paid in advance usually for one year.

7 Balance Sheet Long Term Assets- Fixed assets not intended for sale that are used to manufacture, warehouse and transport the company’s products with a useful life of over one year. Depreciation is the decline in useful value of a fixed assed to to wear and tear. Intangible assets have no physical existence and represent the amount by which the price of an acquired company exceeds the fair value of the asset. The decline in value of an intangible asset is called amortization which is based on a 40 year time period.

8 Balance Sheet Current Liabilities- an obligation that is due and payable within 12 months Accounts Payable- the amount the company owes to its regular business creditors Notes Payable- the amount the company owes to a bank for a loan Accrued expenses- the amount the company owes for salaries and wages to its employees or fees to other services such as lawyers or accountants Current portion of Long term debt- the amount of a loan due and payable within 12 months of the balance sheet date

9 Balance Sheet Long term liabilities- amounts due after one year to include deferred income taxes and loans or bonds (bonds are promissory notes issued by the company to repay an amount with interest in the future)

10 Shareholders Equity Shareholders equity- the total equity interest that all shareholders have in a corporation. It is the total assets minus the liabilities. Capital Stock- represents shares in the ownership of the company. The company can issue several different classes of stock with different rights Preferred stock is stock with a preference over common shares with regard to dividends and the distribution of assets in case of liquidation. These shares have no voice in company affairs (Review $5.83 cumulative $100 par value)

11 Shareholders Equity Common stock has no such limit on dividends and is the form of ownership in a company with voting rights for company matters. Par value is the price at which the stock is issued. Authorized shares is the limit on the amount of stock that can be issued Additional paid in capital is the amount paid by shareholders in excess of the par value Retained Earnings are the accumulated profits the company earns and reinvest or retains in the company less dividends declared to shareholders. One of the 4 financial reports within the Annual Report reconciles the sources and uses of earnings between years. Treasury Stock is when a company buys its own stock back. The company can then resell or cancel that stock. Treasury stock is recorded as a deduction from shareholders equity Total shareholders equity is the sum of stock and retained earnings owed to the owners of the company

12 Income Statement Income statement shows how much the corporation earned or lost during the year. It matches the revenues earned from selling goods and services against all the costs or expenses incurred to operate the company. The difference is the net income for the year. Net Sales represents the source of revenue or sales earned by the company from its customers for goods sold less returned goods and discounts

13 Income Statement Cost of Sales represents all the costs incurred to purchase and convert raw materials into the finished products that it sells. The three basic components are Direct labor Direct material Manufacturing overhead or the costs directly needed to make the product such as rent and electricity. Gross margin is the excess of sales over the cost of sales. The gross margin percentage is computed by dividing gross margin by net sales.

14 Income Statement Research and Development is the cost needed to develop new products or services Selling, general and administrative expenses include salaries and commissions of sales personnel, advertising expenses, office expenses and executive payroll Depreciation and Amortization is the decline in value of fixed assets for one year. Operating Income is the profit or loss of the business from operations before interest and tax expense.

15 Income Statement Interest expense is the current amount of interest due for the year from bank loans and bonds issued Income before taxes is the amount subject to the current tax rate. The rate varies based on total profit and tax credits or adjustments Income Tax is the tax rate percentage that is applied to the income before tax Net Income or the bottom line is the amount the company earns after all taxes and expenses are subtracted from the companies revenues or sales. The total net income is transferred to the balance sheet at the end of the year by adding the amount to the cash and retained earnings categories

16 Income Statement Analyzing the Income Statement-
Change is Sales as a % from the prior year. Investors look for at least a 10% increase in sales from the prior year Cost of Sales- investors look for efficiency improvements with the cost as a % of revenue going down from the prior year Gross Margin % look for an increase from year to year Operating expenses should be controlled from year to year and increase no more than 3-4% Net Income- investors look for a 10% increase year over year Ratios to measure Income statement performance include Return on Investment Gross Profit Margin Times covered

17 Balance Sheet Analyzing the balance sheet
Current Ratio- divides the current assets by the current liabilities. A ratio of 2 to 1 is generally consider adequate Quick Ratio- divides the current assets less inventory by the current liabilities. Better measurement that current ratio since you do not want to use your inventory to pay for your current liabilities Debt to Asset ratio is dividing total debt (short and long term debt by total assets. The higher the % the greater the interest expense and the lower the profits of the company Inventory turnover- measures how quickly you are using your inventory. Divide COGS by Inventory. The greater the number the quicker you are using your inventory and the lower the cost of storing the inventory in your warehouse Days Sales Outstanding- measures how long it takes you to collect your money from your customers. Divide Net receivables (Accounts receivable less allowance for doubtful accounts) by daily sales (total sales for the year divided by 300 days) The lower the number the quicker the collection of money and the better indicator for the company

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