1. Workshop: A Review of Financial Statements with Analysis
Professors Tom Byers and Randy Komisar
Stanford University
With special thanks to:
Roma Jhaveri, Ben Hallen, Filipe Santos, Yosem Companys
Copyright © 2008 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). This document may be reproduced for educational purposes only.

2. Goals of the Workshop
Review main accounting documents and financial analysis
Balance Sheet
Income Statement (Statement of Operations)
Statement of Cash Flows

3. How Does It All Add Up Income Expenses Assets Liabilities
When you get paid for a product or service…
Income
Expenses
When you buy something…
Assets often generate income
Liabilities often generate expenses
Assets
Liabilities
The value of anything you own…
The value of anything you borrow…

4. Some Accounting Principles
Accounting items are classified into “accounts” according to their nature, translated into monetary units, and organized in statements
Basic Accounting formula:
Assets = Liabilities + Equity
What the company owns
How the ownership of assets was financed (By third parties or by the owners)

5. Accounting vs. Market Value
Equity: Ownership of a company is divided in certificates called common shares
Accounting Value (or Book Value) = Equity = Assets – Liabilities
Accounting Value is different from Market Value !!!
Market Value = Share Price * Number of Common Shares Outstanding

6. Income Statement
Reports the economic results of a company over a time period. It shows the derivation of earnings or losses.
Income Statement of XXX Corp. – year $ % Rev.
+ Revenues
- Cost of Revenue (product cost or COGS)
= Gross Margin
Sales and Marketing
General and Administrative
Research & Development
Depreciation and Amortization
= Operating Income (EBIT)
+ Interest Income(expense) net
= Net Income before Taxes
- Income Tax Provision
- Extraordinary Items
= Net Income

7. Income Statement - Analysis
When does a transaction affect income? - When it changes the economic value of the company for the owners
Some Profitability Measures:
Gross Margin (%) = Gross Profit / Sales
Operating Margin = Operating Income / Sales
Return on Sales = Net Income / Sales
Return on Equity = Net Income / Shareholders’ Equity
Other Important Measures
Earnings Per Common Share (EPS) = Net Income / Common Shares
Price Earnings Ratio (P/E) = Market Price / Earnings Per Share

8. Income Statement - Example
The following information was taken from the 2009 financial statements of Wellogg Company. Dollar amounts are in millions.
Cost of goods sold $ 4,128.5
Selling & admin. expenses ,523.6
Interest expense
Other expense
Net sales ,853.3
Income tax expense

9. Income Statement - Example
WELLOGG COMPANY
Income Statement
For the Year Ended December 31, 2009
Net sales $ 8,853.3
Cost of goods sold ,128.5
Gross Profit ,724.8
Selling & admin. expense ,523.6
Income from Operations ,201.2
Interest expense
Other expense
Net Income Before Taxes
Income tax expense
Net Income $

10. Balance Sheet
It is a financial snapshot of a company at a given point in time
Balance Sheet of XXX Corp December of (in thousand $)
Cash and Equivalents
Accounts Receivable
Inventories
Accounts Payable
Accrued Expenses
Short Term debt
Current Liabilities
(payable in less than a year)
Long-Term Liabilities (bonds issued, bank loans)
Shareholders’ Equity
Current Assets
(liquid in less than a year)
Fixed Assets
Other Assets
Property, plant and equipment (minus Depreciation)
Common Stock
Additional Paid-in Capital
Retained Earnings
Intangibles (minus depreciation)
Investment Securities
Total Assets =
Total Liabilities + Shareholder’s Equity

11. Balance Sheet - Analysis
Working Capital: measure of the amout of cash available in the short-term; Also, indication of the funds needed operate within a given business size
= Current Assets – Current Liabilities
Liquidity ratios: measures of the ability to meet short term financial obligations
Current Ratio: Current Assets / Current Liabilities
Acid-test: (Cash + Accounts receivable) / Current Liabilities
Operational Efficiency Measures
Inventory Turnover = Cost of Sales per year / Current Inventory
Accounts Receivable Collection Period = accounts receivable / sales
Accounts Payable Collection Period = accounts payable / cost of sales

12. Balance Sheet - Example
These financial statement items are for Tweeter Entertainment Group at year-end on September 30, (in millions)
Accounts payable $ 38.6
Property, plant & equipment
Receivables
Other current liabilities
Stockholders’ equity
Cash
Long-term debt
Inventories
Accrued expenses
Other current assets
Other liabilities
Other assets

13. Balance Sheet - Example
TWEETER HOME ENTERTAINMENT GROUP
Balance Sheet (in millions)
September 30, 2009
Assets
Current assets
Cash $
Receivables
Inventories
Other current assets
Total current assets
Property, plant & equipment
Other assets
Total assets $ 480.4
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $
Accrued expenses
Other current liabilities
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Stockholders’ equity
Total liab. & stock. equity $

14. Statement of Cash Flows
The Statement of Cash Flows reports cash receipts and payments over a period, separating operational, investing and financing activities.
Statement of Cash Flows of XXX Corp. – $
+ Cash Flow from operating activities (reconciled from income statement)
= income
- net changes in working capital (except cash and equivalents)
+ depreciation and amortization
+ Cash Flow from investing activities
+ Cash Flow from financing activities
= Net Change in Cash or Equivalents
+ Cash or Equivalents at beginning of period
= Cash or Equivalents at end of period

15. Statement of Cash Flows - Analysis
How is cash flow different from income?
Income accrual is not necessarily linked to cash transactions (e.g., depreciation, sales by credit)
Some activities affect cash flows but not income (e.g., investments in fixed assets, additional capital from shareholders)
Growth often absorbs cash flow because of a higher need for working capital and fixed investments (Entrepreneurial firms with negative income and high growth can have a very fast cash burn rate)

16. Statement of Cash Flows - Example
SIERRA CORPORATION
Statement of Cash Flows
For the Month Ended October 31, 2009
Cash flows from operating activities
Cash receipts from operating activities $ 11,200
Cash payments for operating activities (5,500)
Net cash provided by operating activities $ 5,700
Cash flows from investing activities
Purchased office equipment (5,000)
Net cash used by investing activities (5,000)
Cash flows from financing activities
Issuance of common stock ,000
Issued note payable ,000
Payment of dividend
Net cash provided by financing activities ,500
Net increase in cash ,200
Cash at beginning of period
Cash at end of period ,200