1. Balance Sheet Analysis

2. BCI ANALYST TRAINING PROGRAM Agenda Recap of the Income Statement What is the Balance Sheet Assets Liabilities Equity Putting it all together Case Study

3. BCI ANALYST TRAINING PROGRAM What is an Income Statement The income statement summarizes the inflows and outflows of money (not necessarily cash) over an accounting period Inflows = Revenues Outflows = Expenses Inflow Outflow Outflows

4. BCI ANALYST TRAINING PROGRAM Accrual Accounting Example Month 1: You cater an event where the cost to you was $100. The customer pays you $200 for your services. Month 2: You cater an event where the cost to you is $100. The customer agrees to pay you $200 next month

5. BCI ANALYST TRAINING PROGRAM Income Statement Line Items Start with the revenues and filter down through each expense to the bottom line (net income/earnings) Revenue - Cost of Goods Sold (COGS) - Operating Expenses Research and Development Selling, General, & Administrative (SG&A) Depreciation & Amortization - Other Non-Recurring Interest - Taxes = Net Income

6. BCI ANALYST TRAINING PROGRAM Balance Sheet What is it? Snapshot of a company’s financial condition at a specific point in time Called a balance sheet because it balances Everything a company has (assets) is either owed to someone else (Liabilities) or belongs to the firm’s owners (Equity)

7. BCI ANALYST TRAINING PROGRAM Assets The stuff that a company has Assets Definition: resources that bring future economic benefit – either the prospect of future cash inflows or the prevention of future cash outflows

8. BCI ANALYST TRAINING PROGRAM Assets The stuff that a company has Assets vary in liquidity Liquidity – how quickly an asset can be converted to cash Most Liquid Least Liquid  Cash and Cash Equivalents  Accounts Receivable  Inventory & Surplus  Short-term investments  Long-term investments  Property, Plant, and Equipment  Intangibles (including goodwill)  Land Current Assets Long-Term Assets

9. BCI ANALYST TRAINING PROGRAM Liabilities How does a company get these assets? They can borrow money to buy assets Liabilities

10. BCI ANALYST TRAINING PROGRAM Liabilities Types of Liabilities Accounts Payable Deferred Revenue Interest Payable Short-term Debt Current Long-term Debt Long-term Debt Pension Obligations Current Liabilities Long-Term Liabilities

11. BCI ANALYST TRAINING PROGRAM Equity What is Equity The difference between a companies Assets and Liabilities The “book value” of a company Two Different Types of Equity Owner’s Equity – If the company is a sole proprietorship Stockholder’s Equity – If a company is a corporation Includes: Retained Earnings Additional Paid-In Capital Common Stock Preferred Stock

12. BCI ANALYST TRAINING PROGRAM Putting it all together Assets = Liabilities + Equity BCI & Company buys a factory for $1 Billion, using some of its own cash and $400 Million of money it borrowed from the bank What happens to the balance sheet?  $600M cash decrease  $1000M PP&E increase TOTAL: Assets up $400M Assets Liabilities  $400M borrowed TOTAL: Liabilities up $400M

13. BCI ANALYST TRAINING PROGRAM Putting it all together Assets = Liabilities + Equity BCI & Company delivers its service for $8000. The customer paid only $1000, promising to pay the remaining in monthly installments What happens to the balance sheet?  $ 1000 cash increase  $7000 accounts receivable increase TOTAL: Assets up $8000 Assets Equity  $8000 increase in retained earnings TOTAL: Equity up $8000

14. BCI ANALYST TRAINING PROGRAM The Balance Sheet Case Introduction Does the balance sheet capture the real value of a company? Not really Cost Principle: Companies report assets at their historical cost Monetary Unit Assumption: Assumes the dollar is stable over time This creates problems Is a piece of land worth $20,000 in 1950 worth only that amount today? What is the purchasing power of $20,000 today anyway?

15. BCI ANALYST TRAINING PROGRAM The Balance Sheet Case Study

16. BCI ANALYST TRAINING PROGRAM The Balance Sheet Case Study An asset’s book value can be higher or lower than its true value Some assets are essentially fictional

17. BCI ANALYST TRAINING PROGRAM The Balance Sheet Microsoft Case Study What happened in Q4 2012?

18. BCI ANALYST TRAINING PROGRAM The Balance Sheet Microsoft Case Study aQuantive was the 14 th largest advertising firm agency worldwide in 2005 In 2007, MSFT spent $6.3B to acquire aQuantive It paid an 85% premium over the then-current stock price “Joining the capabilities of [MSFT and aQuantive] is an important step toward our goal of becoming an industry leading, Internet-wide advertising platform.” - Kevin Johnson, Platforms and Services Division President, Microsoft

19. BCI ANALYST TRAINING PROGRAM The Balance Sheet Microsoft Case Study When you pay a premium for a company, the premium is recorded as “Goodwill” on a balance sheet Example If BCI & Co. pays $10 for “Common Cents Investment Group” with a book value of $5, what happens to BCI & Co.’s balance sheet? Assets Cash will decrease $10 Common Cents’ assets of $5 will be added Goodwill will increase $5 to balance out the transaction

20. BCI ANALYST TRAINING PROGRAM The Balance Sheet Microsoft Case Study

21. BCI ANALYST TRAINING PROGRAM The Balance Sheet Microsoft Case Study Who here uses Google? Who here uses Yahoo? Does anyone use… Bing? aQuantive was been never made a penny for Microsoft In 2012, Microsoft was forced to admit that their $6B of goodwill was worth almost nothing In other words, Microsoft “wrote down” the worthless goodwill

22. BCI ANALYST TRAINING PROGRAM The Balance Sheet Microsoft Case Study