Course Notes
Reading Financial Statements
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Advance Your Career
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Reading Financial Statements
2017, all rights reserved. [Link]
Reading Financial Statements
Course Objectives:
Reading and understanding company annual reports, and sets of financial
statements
2017, all rights reserved. [Link]
Understanding the Balance Sheet
2017, all rights reserved. [Link]
Three Key Financial Statements
1. Balance sheet
2. Income statement
3. Statement of cash flows
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Balance Sheet
Represents the company at a point in time
Assets, liabilities and equity
Helps in determining the financial stature and strength of the company
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Income Statement
Represents the company over a period of time
Revenue, expenses and profit
Demonstrates profitability
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Statement Of Cash Flows
Acts like a bank statement
Reconciles the opening cash balance with the closing cash balance
Connects the income statement to the balance sheet
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Statement Of Cash Flows
Divided into three specific cash flow types
A useful financial statement to understand where cash is being generated
and used in the business
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Simplified Balance Sheet
May be presented in a horizontal or vertical format
Displays current and non-current accounts
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Current Vs Non-current
Assets
Current: will be redeemed in a year or less
Non-current: to be held for longer than a year
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Current VS NON-CURRENT
Liabilities
Current: amounts due to a creditor in a year or less
Non-current: obligations due for terms longer than a year
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Microsoft Balance Sheet Demonstration
Includes Assets, Liabilities and Equity
Microsoft statement is in millions of dollars
Always has a notation if the numbers are not reported as whole dollars
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Microsoft Balance Sheet Demonstration
2010 and 2009 accounts are reported to provide comparative results
See accompanying notes at the bottom
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Microsoft Balance Sheet Demonstration
Accounts making up the balance sheet
Cash Accounts payable
Accounts receivable Debts
Inventories Common stock
Property and Equipment Retained deficit
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Investments
Investments are held to take advantage of idle cash
Alternatively, investments help accumulate cash
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Investments
Investments can be:
Internal or external
Short term or long term
Debt or equity
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Deferred Income Tax
Often seen on financial statements
Due to difference between tax and accounting rules
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What Is Goodwill?
The difference between purchase price and fair value
Recorded as non-current asset
Remeasured every year
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Intangible Assets
Assets that generate revenue, but without physical substance
Examples are trademarks, patents and copyrights
Recorded as non-current assets
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Unearned Revenue
Arises when a company is paid for an undelivered good or service
Examples are licenses and subscriptions
The balance is shown as liability
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Commitments
Future obligations that a company agrees to
Examples are new buildings, building improvements and
leasehold improvements
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Contingencies
Possibilities that are not 100% certain
Example: Lawsuit
Accounting rules are conservative; contingent losses are recorded,
while contingent gains are harder to allow
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Contingencies
The liability must be recorded if:
1. A future event will confirm impairment of an asset or a liability
existed as at balance sheet date
2. The loss amount can be reasonably estimated
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Common Vs Preferred Shares
Common shares
Residual claim to assets
Voting rights
Partake in profits
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Common Vs Preferred Shares
Preferred shares
Fixed dividend
Paid before common shares
Has a par value
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Authorized Vs Outstanding Share Capital
Authorized shares are the maximum saleable shares
Outstanding shares are the total shares held by investors currently
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Contributed Surplus
Excess value received above par value of a share
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Other Comprehensive Income
Gains and losses outside of main operations
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Balance Sheet Component Matching Exercise
Open the balance sheet component matching exercise and
balance sheet component matching solution for results
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Statement Of Shareholders Equity
Itemizes equity transactions for the period
This consists of stock and retained earnings
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The Full Disclosure Principle
Notes are provided below financial statements for additional
information
Notes allow for stronger judgment by readers
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Three Key Financial Statement Notes
1. Significant accounting policies
2. Direct information
3. Indirect information
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Significant Accounting Policies
Company accounting principles
Valuation techniques
Financial instruments
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Significant Accounting Policies
Revenue recognition
Depreciation methods
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Direct Information
Breakdown of investment types
Debt
Financial assets
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Indirect Information
Commitments
Contingencies
Stock based compensation plans
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Noteworthy exercise
Open the Noteworthy exercise and Noteworthy solution for
results.
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Understanding The Income Statement And Cash
Flow
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Three key financial statements
1. Balance sheet
2. Income statement
3. Statement of cash flows
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Single Step Vs Multi-step Income Statements
Single step
Groups revenues vs expenses in separate sections
Profitability/net income is shown at the very end
Multi step
More commonly seen
Displays revenues then expenses in a logical order
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Cost Of Sales
The direct costs of the items sold or services provided
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Selling, General And Administrative
Varied expense items
Expenses outside of cost of goods sold
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Gains And Losses
Related to sale, gains and losses of investments
Alternatively, related to exchange rate translations
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Microsoft Income Statement Exercise
Open the Microsoft income statement exercise and Microsoft
income statement solution for results
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The Cash Flow Statement
Inflows and outflows of cash
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Cash Flow Activities
Sorted by:
Operating activities
Investing activities
Financing activities
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Operating Activities
Main operations
Revenues collected and expenses paid
If indirect method, add back non-cash expenses
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Investing Activities
Long-term assets needed for the business
Companies must reinvest cash back into the business
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Financing Activities
Equity or debt transactions
The method by which a company raises funds
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Direct Method Vs Indirect Method
Statement of cash flows can be prepared using direct or indirect
method
CFO is derived differently; CFF and CFI are the same
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Direct Method
Begins with cash transactions
Classifies into receipts from customers, and payments to suppliers
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Indirect Method
Begins with net income
Non-cash and non-CFO transactions are added back to arrive at CFO
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Key Elements In A Cash Flow Statement
Net cash
Changes in working capital
Capital expenditure
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Microsoft Cash Flow Statement Exercise
Open the Microsoft cash flow statement exercise and Microsoft
cash flow statement solution for results.
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The Benefits Of An Annual Report
Mixture of financial and non-financial information
Hear from the company itself
Management may provide explanations for their strategy
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Contents Of Annual Report
Letter to shareholders
Description of business
MD&A
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Contents Of Annual Report
Reporting on internal controls
Audit report
Three Financial Statements
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Management Discussion And Analysis
Explanation for:
Past performance
Financial highlights
Future strategic direction
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Management discussion and analysis
Lists future actions to be taken
Identifies the key risks facing the organization
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Microsoft reporting challenge exercise
Open the Microsoft reporting challenge exercise and Microsoft
reporting challenge solution for results
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Advance Your Career
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