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Georgetown Collegiate Investors

Risk Committee Educational Program. By Carlos Roa (CRO)



Education Session 2: Introduction to
Financial Statements
Understanding the Fundamentals
Financial Statements
Required by law as elements of reporting
Used to assist investors/shareholders in achieving sets of
comparable information
Without consistent reporting and accounting standards, it would
be difficult to perform valuation
Accounting terms are necessary to understand later forms of ratio
analysis and discounted cash flow (DCF) modeling
Types of Financial Statements
US Version [International]
Securities & Exchange Commission (SEC)
10K [Annual report]
10Q [Quarterly report]
S-1 [Prospectus for IPO]
S-3 [Prospectus for follow-on offering]
International Accounting Standards
FASB (Financial Accounting Standards Board)
GAAP (Generally Accepted Accounting Principles)
IASB (International Accounting Standards Board)
Set uniform standards for
accounting practices
US GAAP to conform to IASB
practices within a few years
Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
Income Statement
Charts a companys revenue
Subtracts expenses to achieve a net income figure
Revenues
Expenses
Net Income
Income Statement
+ Revenues (sales)
- Cost of Goods Sold (the production costs)
Gross Profit
- Selling, General, & Administrative Expense (SG&A) (Salaries, Advertising,
Supplies)
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- Depreciation
EBIT (Operating Income)
- Interest Expense (the interest on debt)
Taxable Income
- Income Taxes
Net Income

Balance Sheet
A snapshot in time of the company, taking account of all its
properties, cash, debt, etc.
Used to calculate a number of key investment ratios
Total assets, liabilities, and ownership
Indicator of debt vs. equity mix
The Accounting Equation

Assets = Liabilities + Shareholders Equity
Assets
Liabilities
Shareholders Equity
Assets
Asset: Something that provides a future benefit
Current Assets: Assets expected to be converted to value within 1 year
Cash
Accounts Receivable
Money owed from completed sales, expected to be collected
Inventory
Expected to be sold during the current year; products on shelves
Prepaid Expenses
Prepaid benefits are theoretically assets set aside to be used
Supplies
Office supplies: pens, paper and such expected to be used
Long-term Assets: Assets expected to be converted to value within >1
year
Property, Plant, and Equipment (PPE)
Goodwill
Money paid in excess of fair value for an acquisition (Google/YouTube)
Liabilities
Liabilities: Claims by creditors (others) against the company
Current Liabilities: Obligations due in <1 year
Accounts Payable
Money owed to suppliers
Short-term Debt
Bank debt or bonds to be paid back in the current year
Current Portion of a Long-Term Debt
The piece of a long-term bond or loan due in the current year
Accrued Expenses
Expenses not yet paid for (such as power bills, rent, debt interest)
Unearned Revenue
A liability as the company must deliver a product or service
Long-term Liabilities: Obligations due in >1 year
Long-term Debt
Shareholders Equity
What the stockholders are to receive, or currently own, as a
part of the company
Paid in Capital
The seed money given by investors to start the company
Also includes stock shares at book value
Retained Earnings
The cash savings of a company not yet disbursed to
shareholders or reinvested in production
Book Value Measurement
Accounting statements are done at book value
Aims to provide a common definition and concrete value towards
financial concepts
Assesses the value of items at historical cost
The cost paid for the item when acquired
Book Value per Share = Total Common Equity/Shares Outstanding
Book vs. Market Value
Market value is more important than book value
Market value takes into account
Companys earnings potential, market share, etc.
Comparable, real-time valuation versus other firms
The time value of money
Book value and accounting terms are essential to understand
market valuation
Analysis of how market reacts to companies with specific book
characteristics allow investors perceive over/under-valuation
Statement of Cash Flows
Measures how free cash changes during the year (the cash
register drawer)
End of previous year cash balance (Net Income)
Changes in Cash Flow from:
Operations
Financing
Investing
Statement of Cash Flows (Cont.)

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