Analyzing Financial Statements

For Investing and Credit Decisions

Analysis Techniques

Trend analysisCommon sizeKey ratios

Trend Analysis - Income Statement

• Examining trends in account balances• Examine key performance indicators such as– Revenue– Income from operations– Net income

• Watch for one time charges

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) 12 Months EndedIn Millions, except Share data in Thousands Sep. 25, 2010 Sep. 24, 2011 Sep. 29, 2012

Net sales $65,225 $108,249 $156,508 Cost of sales 39,541 64,431 87,846Gross margin 25,684 43,818 68,662Operating expenses: Research and development 1,782 2,429 3,381Selling, general and administrative 5,517 7,599 10,040Total operating expenses 7,299 10,028 13,421Operating income 18,385 33,790 55,241Other income/(expense), net 155 415 522Income before provision for income taxes 18,540 34,205 55,763Provision for income taxes 4,527 8,283 14,030Net income $14,013 $25,922 $41,733 Earnings per share: Basic $15.41 $28.05 $44.64 Diluted $15.15 $27.68 $44.15 Shares used in computing earnings per share: Basic 909,461 924,258 934,818Diluted 924,712 936,645 945,355Cash dividends declared per common share $0.00 $0.00 $2.65

Apple Inc. Income Statement

Note – the reporting convention is to put the most recent year on the left. The reports in these slides are modified to present oldest information on the left.

Sep. 25, 2010 Sep. 24, 2011 Sep. 29, 2012$0

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Apple Inc

Net salesCost of sales

$ m

m

Trend Analysis - Balance Sheet

• Examine key performance indicators– Total assets– Property, plant, and equipment– Current portion of long-term debt– Long-term debt– Debt compared to equity

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CONSOLIDATED BALANCE SHEETS (USD $)Sep. 24, 2011 Sep. 29, 2012

In Millions, unless otherwise specifiedCurrent assets: Cash and cash equivalents $9,815 $10,746 Short-term marketable securities 16,137 18,383Accounts receivable, less allowances of $98 and $53, respectively 5,369 10,930Inventories 776 791Deferred tax assets 2,014 2,583Vendor non-trade receivables 6,348 7,762Other current assets 4,529 6,458Total current assets 44,988 57,653Long-term marketable securities 55,618 92,122Property, plant and equipment, net 7,777 15,452Goodwill 896 1,135Acquired intangible assets, net 3,536 4,224Other assets 3,556 5,478Total assets 116,371 176,064Current liabilities: Accounts payable 14,632 21,175Accrued expenses 9,247 11,414Deferred revenue 4,091 5,953Total current liabilities 27,970 38,542Deferred revenue - non-current 1,686 2,648Other non-current liabilities 10,100 16,664Total liabilities 39,756 57,854Commitments and contingencies Shareholders' equity: Common stock, no par value; 1,800,000 shares authorized; 939,208 and 929,277 shares issued and outstanding, respectively 13,331 16,422

Retained earnings 62,841 101,289Accumulated other comprehensive income 443 499Total shareholders' equity 76,615 118,210Total liabilities and shareholders' equity $116,371 $176,064

Apple Inc. Balance Sheet

In 2012, Apple had no long-term debt.

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Apple Inc. Balance Sheet

Total liabilitiesTotal shareholders' equity

$ m

m

Trend Analysis - Statement of Cash Flow

• Key performance indicators– Primary source of cash for the period should be from

operating cash flow– Net increase in cash from all activities for the period– Discretionary cash flow availability

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) 12 Months EndedIn Millions, unless otherwise specified Sep. 25, 2010 Sep. 24, 2011 Sep. 29, 2012

Cash and cash equivalents, beginning of the year $5,263 $11,261 $9,815 Operating activities: Net income 14,013 25,922 41,733Adjustments to reconcile net income to cash generated by operating activities:

Depreciation and amortization 1,027 1,814 3,277Share-based compensation expense 879 1,168 1,740Deferred income tax expense 1,440 2,868 4,405Changes in operating assets and liabilities: Accounts receivable, net -2,142 143 -5,551Inventories -596 275 -15Vendor non-trade receivables -2,718 -1,934 -1,414Other current and non-current assets -1,610 -1,391 -3,162Accounts payable 6,307 2,515 4,467Deferred revenue 1,217 1,654 2,824Other current and non-current liabilities 778 4,495 2,552Cash generated by operating activities 18,595 37,529 50,856

Apple Inc. Statement of Cash Flows

-----Operating activities only-----

Sep. 25, 2010 Sep. 24, 2011 Sep. 29, 20120

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Apple Inc

Cash generated by operating activi-ties

$ m

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What would you compare this to?

Summary

• Trend analysis shows us changes in statement amounts over time.

• Start with major amounts then investigate related accounts to explain changes in trend.