Transcript Slide 1

October 20th, 2008 presentation:
"FASB stands for the Financial
Accounting Standards Board. They
are among the most useless people
on the planet and they are
standing in the way of patriotic
American commerce. Imagine the
lamest Star Trek-watching nerds
hellbent on punishing the
successful and cool kids with their
nitpicky rules."
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Needed for…
◦ Ability to accurately and properly interpret financial
statement data
◦ Use in valuation modeling
 Discounted Cash Flow Model, etc.
◦ Understanding the health of a business
◦ Identifying past, current, and forecasting future
performance
 Return on Equity, Free Cash Flow, other ratios
◦ How it affects the manner in which its components
are reported
 Mark-to-market regulations, etc.
 This has become a major hotspot lately; if you’re
interested, do a Google search for “FAS 157”
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These are what publicly traded companies
issue through the SEC and GAAP to report
quarterly and yearly performance
Many sites (Yahoo, Google Finance, etc.)
report semi-accurate data
◦ However, often times they are not the best source
for in-depth research

Best to look at the actual filing
◦ Sources?
 investing.businessweek.com
 sec.edgar-online.com
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What are the three (primary) financial
statements?
◦ Balance Sheet
 Also called Statement of Financial Position
◦ Income Statement
 Also called Statement of Earnings
◦ Statement of Cash Flows
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This statement lists all of the companies
revenues, expenses, gains, and losses for a
given period of time
◦ Example: Apple, Inc.
 Revenue = Sale from an iPod, Macbook, etc.
 Expense = Cost of goods sold (items needed to
manufacture a product), salaries/wages, research &
development, etc.
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Important to distinguish differences within
each type of account
◦ Is that revenue part of our normal operations or
from interest/investments?
◦ What type of expenses is the company incurring
and in what volume?
◦ Is this gain or loss occurring frequently or once in a
lifetime?
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What is depreciation/amortization?
◦ When a company purchases an asset, it has a
limited useful life (5 years, 20 years, etc.)
◦ Depreciation is an annual expensing of the original
purchase price of said asset
◦ There are many methods available, but the principle
remains the same
◦ Key point: Depreciation in a NON-CASH expense
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Net Income and Earnings Per Share
◦ Ultimately, every company reports net income (or
loss) for the given period
 It’s important to know everything to goes into
calculating this number
◦ Earnings Per Share (EPS) =
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
 Allows comparison of company profitability regardless
of overall size
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Here’s a shortened version of Apple’s:
($'s in millions except EPS)
Revenue
Cost of Goods Sold
Gross Profit
SG&A Expense
Research and Development
Depreciation/Amortization
Operating Income
Non-operating Income (Expense)
Income Tax Provision
Extraordinary Items
Net Income
Common Shares Outstanding
Earnings Per Share
2007
$ 24,006.00
(15,852.00)
8,154.00
(2,963.00)
(782.00)
4,409.00
599.00
(1,512.00)
$ 3,496.00
900.00
3.88
$
2006
$ 19,315.00
(13,717.00)
5,598.00
(2,433.00)
(712.00)
2,453.00
365.00
(828.00)
$ 1,990.00
877.00
2.27
$
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Similar to the Income Statement, as it
provides information about a company during
a given period of time
However, the Statement of Cash Flows only
deals with what the company did with their
CASH
A company may be profitable according to
their Income Statement, but they may have
trouble generating cash
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The different components
Cash flows from…
◦ Operating activities
◦ Investing activities
◦ Financing activities
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Useful for determining with the company did
with its cash
◦ Are they collecting a reasonable amount from their
normal operations?
◦ Are they spending a lot of their cash on new assets,
prospects for expansion, etc.?
◦ If they have an excess amount sitting around, are
they paying out a dividend?
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Free Cash Flow (FCF):
𝐹𝐶𝐹 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠
◦ Operating Cash Flow  Inflow or outflow from everyday
operations
◦ Capital Expenditures  Outflow used to acquire or
upgrade physical assets such as machinery, buildings,
etc.
◦ Good indicator of whether or not the company is
expanding and still has cash on hand to pay its current
debt obligations
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Here’s a shortened version of Apple’s:
($'s in millions)
Net Income
Depreciation
Non-cash Items/Deferred Taxes
Changes in Working Capital
Cash Flow from Operating Activities
Capital Expenditures
Other Investing Cash Flow Items
Cash Flow from Investing Activities
Financing Cash Flow Items
Issuance of Stock (Retirement)
Cash Dividends Paid
Cash Flow From Financing Activities
Net Change in Cash
$
$
$
$
2007
3,496.00
317.00
332.00
1,325.00
5,470.00
(986.00)
(2,263.00)
(3,249.00)
377.00
362.00
739.00
$ 2,960.00
$
$
$
$
2006
1,989.00
225.00
227.00
(221.00)
2,220.00
(657.00)
1,014.00
357.00
361.00
(37.00)
324.00
$ 2,901.00
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Reports a company’s assets, liabilities, and
shareholder’s equity at an exact point in time
Differs from the previous two in this aspect;
they cover a period of time whereas the
Balance Sheet is a “snapshot”
Useful in determining the company’s
structure
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The different components:
◦ Assets
 These represent future economic benefits
 Can be current and non-current
 Ranked on the Balance Sheet in order of their ease of
liquidity (how easy can you convert this asset into
cash?)
 The most liquid assets are listed at the top (cash,
marketable securities, etc.)
◦ Liabilities
 These represent future economic sacrifices
 Can be current and non-current
 Important to know how much debt the company is
obligated to pay in the next few years
◦ Shareholder’s Equity
 Represents the owner’s interest (that’s you!) in the
company
 Contains an important account: RETAINED EARNINGS
 Takes a company’s net income and shows if they pay it
out as a dividend or re-invest it
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Important for analyzing the capital structure
of the company
◦ Do they have a lot of cash relative to their debt? If
not, do they have a lot of liquid assets?
◦ How do they finance their investments? Mainly
through stock issuance or with bonds/borrowing?
◦ Do they have a lot of intangibles (goodwill, patents,
etc.)?
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Let’s take a look at the handout
This is Apple’s condensed Balance Sheet for
the years 2004-2007
What’s good about it? What might not be so
good?
How might they be structured differently
from a newly formed company?
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At a later date we will introduce more
advanced concepts of accounting
◦ Financial Ratios
 Profitability, Leverage, Solvency, Liquidity, Efficiency
 Comparison to other companies in the same industry
◦ Valuation modeling
 Is the company’s equity more than its market cap?
◦ Anything else you guys would like to learn more
about
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Show by realistic example how to choose
investments
Provide a sample portfolio of value
investments for a college-aged investor
Learn about different stocks and companies
and what makes them attractive investment
opportunities
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Encourage discussion and debate
Maintain records of the portfolio to learn
from mistakes and successes
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Start with $20,000 cash
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Trades cost $7 (ScottTrade pricing)
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Placing a trade requires a majority of present
and voting members to approve
Provide rationale and analysis for each
investment on the appropriate forum page
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Reason for buying?
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Selling Strategy / Expected Duration?
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Reason for Selling?
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Analysis (What went well, what did not)