"the income statement and cash flows" in minneapolis 2011

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Jimmy Gentry presents "The Income Statement and Cash Flows" in Minneapolis on Oct. 4, 2011 at the Star Tribune during the Reynolds Center's free workshop, "Business Journalism Boot Camp."For more information about free training for business journalists, please visit businessjournalism.org.

TRANSCRIPT

  • 1.Business JournalismBoot Camp
            • The Income Statement
          • And Cash Flows
          • Oct. 4, 2011

2.

  • Donald W. Reynolds National Center
  • For Business Journalism
  • At Arizona State University

Income Statement and Cash Flows 3.

  • James K. Gentry, Ph.D.
  • Clyde M. Reed Teaching Professor
  • School of Journalism and Mass Communication
  • University of Kansas
  • [email_address]

Income Statement and Cash Flows 4. Types of Companies

  • Public
  • Private
    • Financial statements conforming to public company statements
  • Non-profits

Income Statement and Cash Flows 5. Important Terms

  • Unaudited
  • Audited
  • Accountants
  • Certified Public Accountants (CPAs)
  • GAAP, FASB, AICPA, PCAOB

Income Statement and Cash Flows 6. Assessing a Company

  • Context
  • Trends
  • Rules
  • Outsiders
  • Insiders

Income Statement and Cash Flows 7. Annual Report (or 10-K)

  • Auditor s report: Clean, qualified?
  • MD&A or Management s Discussion and Analysis
  • Financial statements and footnotes
  • Management s letter if annual report

Income Statement and Cash Flows 8. MD&A

  • Must read it
  • Often a source of good information and insights
  • Densely written
  • Explains financial information
  • SEC says it wants greater transparency

Income Statement and Cash Flows 9. Goal of Accounting

  • Record, classify and report financial transactions. To provide managers across the organization with information that facilitates:
    • Control of activities and expenditure
    • Refinement of operational plans
    • Accountability
    • Reporting on project outcomes
    • Writing of bids for new funds

Income Statement and Cash Flows 10. Goal of Finance

  • Maximize shareholder wealth as reflected in market price of the stock
  • Achieving this goal requires financial manager to focus on economic profit, not accounting profit

Income Statement and Cash Flows 11. Financial Decisions

  • Long-term investment decisions
    • Capital budgeting: Assets company wants to hold
  • Long-term financing decisions
    • Capital structure: Funds for long-term investments
  • Working capital management decisions
    • Net working capital

Income Statement and Cash Flows 12. Generally Accepted Accounting Principles

  • Guidelines based on theory and practice
  • Evolved over time
  • Procedures, concepts and standards

Income Statement and Cash Flows 13. GAAP: Assumptions

  • Periodicity
  • Going concern
  • Economic entity
  • Monetary unit

Income Statement and Cash Flows 14. GAAP: Principles

  • Full disclosure
  • Matching
  • Historical cost
  • Revenue realization
  • Consistency

Income Statement and Cash Flows 15. GAAP: Underlying Considerations

  • Materiality
  • Industry practices
  • Conservatism

Income Statement and Cash Flows 16. Cash or Operating Cycle

  • Cash
  • Purchase inventory
  • Produce product
  • Sell product
  • Cash

Income Statement and Cash Flows 17. Cash or Operating Cycle (cont.)

  • Cash
    • Cash
    • Receivables
    • Debt
  • Inventory
    • Raw materials
    • Work in progress
    • Finished goods

Income Statement and Cash Flows 18. Cash or Operating Cycle (cont.)

  • Sell product
    • Accounts receivable
    • Cash
  • Cash
    • Collect receivables as cash
  • Pay off payables
  • Start over

Income Statement and Cash Flows 19. Accrual Method

  • Records revenues as soon as thesale occurs
  • Records expenses as soon as the bill is received
  • IE, transactions enter the financial records when they occur, not when cash changes hands
  • Accrual method, therefore, showsscores, not real spendable dollars

Income Statement and Cash Flows 20. About These Numbers: They re Squishy

  • Goods will not necessarily be paid for
  • Goods are not necessarily going to be kept
  • Inventory might be out of date, obsolete or unsellable
  • Status of some inventory may be uncertain
  • Intangible assets are estimates

Income Statement and Cash Flows 21. About These Numbers: They re Squishy (cont.)

  • Machinery or other fixed assets might be obsolete or falling apart long before the so-called useful life is up
  • Goodwill
  • Accounting conventions
  • Timing issues
  • Bottom line: In many ways, statements are a collection of estimates.

Income Statement and Cash Flows 22. Because They re Squishy

  • You need to know the rules and assumptions used to create the numbers

Income Statement and Cash Flows 23. Income Statement or ...

  • Statement of earnings
  • Statement of operations
  • Statement of income and comprehensive income

Income Statement and Cash Flows 24. Income Statement

  • Covers a period of time, typically a year or quarter
  • Reports income from ongoing activities
  • Reports income from activities beyond management s control (comprehensive income)
  • Involves estimates

Income Statement and Cash Flows 25. Basic Income Statement

  • Sales or revenues
  • Expenses
  • Taxes
  • Net income or profit

Income Statement and Cash Flows 26. Income Statement

  • Sales or revenues
  • Cost of goods sold
  • Gross profit
  • Operating expenses
    • Sales, general and administrative
    • Depreciation, amortization
  • Operating profit
  • Other income/expenses
  • Interest
  • Income taxes
  • Net income or profit

Income Statement and Cash Flows 27. Cost of Goods Sold

  • Expenses incurred in the cost of manufacturing or creating or acquiring the product the company sells.

Income Statement and Cash Flows 28. Cost of Goods Sold

  • Manufacturer: What the company pays for inventory, i.e. raw materials and supplies used to make its product(s). Includes price of raw materials plus cost of turning it into a product, and transportation costs, i.e. direct factory labor, overhead costs, energy costs. Inventory is largest percent of CGS for manufacturer.

Income Statement and Cash Flows 29. Cost of Goods Sold

  • Retailer: What the company pays suppliers for the products it sells on its shelves. Only the cost of merchandise purchased for resale, not the cost of providing the service to customers.
  • Service business: Since it doesn t make or sell a product per se, typically find a modest CGS.

Income Statement and Cash Flows 30. SGA

  • Includes office expenses, accounting, shipping department, advertising, R&D, depreciation and other expenses that can t be directly attributed to particular items for sale.
  • Often includes depreciation and amortization.

Income Statement and Cash Flows 31. Other Income/Expenses

  • Discontinued items
  • Unusual/extraordinary items
  • Changes in accounting principle
  • Impairment charge
  • Sale of investment
  • Minority interest

Income Statement and Cash Flows 32. Thinking Inside the Box

  • Revenues
  • Minus cost of goods sold
  • Equals gross profit
  • Minus operating expenses
  • Equals operating profit
  • Minus or plus other expenses/income
  • Minus or plus interest expenses/income
  • Minus income taxes
  • Net income

Income Stateme