1. We will begin with financial statements analysis The SEC requires all companies that sell securities to the public to disclose information about the company’s operations and performance – For shareholders and analysts this is the primary source of information about the company. – Users can also rely on the regularity of the reports, i.e., you can expect an update every quarter 1

2. Company filings can be accessed through the SEC’s EDGAR database: http://www.sec.gov/edgar/searchedgar/companysearch.html 2

3. Three primary financial statements – Balance sheet – Income statement – Cash flow statement Fourth statement – Statement of shareholders’ equity 3

4. Balance sheet – Statement of the firm’s investments and who has claims to the payoffs from those investments – Lists assets, liabilities, and shareholders’ equity Assets – investments that are expected to generate payoffs. – Current assets – assets that are expected to be converted to cash within a year Liabilities – claims to the payoffs by claimants other than shareholders (e.g. debt holders --- banks and/or bond holders, suppliers) – Current liabilities – cash will be needed to settle these claims within a year Shareholders’ equity – claim by the owners. – Balance sheet equation: Shareholders’ equity = Assets - Liabilities 4

5. Let’s get SBUX’s latest annual financial statements 5 Type 10-K Click on “Interactive Data”

6. 6 Total Assets Total Liabilities Shareholders’ equity

7. Income statement – Displays the sources of net income Net income – “bottom line” measure of how shareholders’ equity increased or decreased as a result of business activities (we will also refer to business activities as operations) Broadly speaking, Net Income = Revenues - Expenses 7

8. Typical income statement format Net revenue - Cost of goods sold = Gross profit - Operating expenses = operating income before taxes (EBIT) - Interest expense = Income before taxes - Income taxes = Income after tax and before extraordinary items + Extraordinary items = Net income - Preferred dividends = Net income available to common shareholders 8

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10. Cash flow statement – Describes how the firm generated and used cash during the period – Three types of cash flows Cash flow from operations – cash generated from selling products minus cash used up to sell the products Cash flow from investing activities – cash spent on buying assets to be used in operating activities minus cash received from selling assets Cash flow from financing activities – cash transactions to raise cash from debt (borrow) or equity (issue new shares) minus cash paid to debt (pay debt) or equity holders (dividends and/or repurchases) 10

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12. Statement of shareholders’ equity – Explains how shareholders’ equity changed over the period Ending equity = Beginning equity + Comprehensive income – Net payout to shareholders – Comprehensive income = Net income + Other comprehensive income – Shareholders’ equity Increases from earnings from business activities Decreases if there is a net payout to shareholders – Net payout = Proceeds from share issues – Total payout – Total payout = dividends+ repurchases 12

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