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Three financial statements income statement, balance sheet, cash flow statement Purpose of the Income Statement show stakeholders whether the company made or lost money during the period being reported Brainpower Read More Previous Play Next Rewind 10 seconds Move forward 10 seconds Unmute 0:00 / 0:15 Full screen Revenue (Sales) amount charged for the delivery of goods or services Cost of Sales (Cost of Goods Sold) the direct cost of producing revenue (raw materials, direct wages, etc.) Gross Profit revenue less cost of sales Operating Expenses all other expenses required to run the business (management, salaries, marketing, travel, etc.) operating income (EBIT) revenue - cogs - operating expenses Non-operating expenses expenses or income not related to regular business of company (interest expense, restructuring) Corporate Taxes local and federal income taxes the company incurs Net Income (Earnings) Revenue - Expenses what does gross profit indicate? How efficiently labor and supplies are used in the production process what does operating income (EBIT) tell us? The company's earning power from ongoing operations What does net income (earnings) tell us? Indicates the increase in shareholder's value resulting from operations What does the balance sheet report? Organization's financial position at a particular point in time, discloses the resources a company controls (assets) and the claims on those resources (liabilities and equity) Basic Accounting Equation Assets = Liabilities + Stockholders' Equity double-entry accounting The recording of debit and credit parts of a transaction Accrual Accounting recording in each fiscal period applicable expenses, whether paid or not, and income earned, whether collected or not. Common income statement items Revenue - COGS = Gross Profit - OPEx = Operating Margin (EBIT) - NonOP Ex = Income before Tax - Corporate Tax = Net Income (Earnings) Common balance sheet items Cash Accounts Receivable = Total Current Assets + Fixed Assets = Total Assets ------------------------ Accounts Payable + Short Term Debt = Total Current Liabilities + Long Term Debt = Total Liabilities + Shareholders Equity = Total Liabilities and Equity Cash current assets comprising of currency or currency equivalents Accounts Receivable amount owed to an organization from the sale of its products or services fixed assets value of assets and property that cannot be easily converted to cash and has a useful life of greater than 1 year (PPE) Accounts payable amount owed to organizations vendors Debt amount of obligations owed to creditors Equity cumulative shareholder investment plus cumulative net income Working Capital (NWC) A measure of a company's liquidity and short-term financial health; computed as current operating (non cash) assets minus current operating (non debt) liabilities. Why is debt cheaper than equity? In Short: LESS RISKY Interest expense is tax-deductible, hence the (1-tax rate) in the WACC formula Debt is senior to equity in the cap structure, so in a bankruptcy, liquidation debtholders would get paid off first Intuitively, the cost of debt (interest rates) is lower than the cost of equity (which is often around 10%+), so debt will lower WACC Net Debt Total Debt - Cash What does the cash flow statement show? How much cash is generated or lost during a period of time, reconciling net income with cash (breaks down into operating, investing, and financing activities) Cash from Operating Activities amount of cash generated by an organization's normal business operations (net earnings, depreciation/amortization, change in working capital) cash from investing activities Cash flow related to acquisition and disposal of the organizations long term investments (PPE, M&A, CapEx) Cash from financing activities Cash flow between organization and its owners and creditors (repayments, dividends, share repurchases) Change in Cash operating cash flows + investing cash flows + financing cash flows Depreciation and Amortization allocating the cost of an asset over its useful life- non cash expense on the income statement (cash only leaves company when purchased CapEx) and is a source of cash on operating cash flows Capital Expenditures CapEx - funds used by the company to purchase or upgrade physical assets such as PPE Change in Working Capital Prior period NWC - Current Period NWC Increase= USE OF CASH Decrease= SOURCE OF CASH Share Repurchases Reacquisition by an organization of its own stock, either retires shares or converts to treasury stock Remaining owners have higher ownership percentage, and portion of earnings Thus, repurchases are a form of returning capital to investors and one that can be instituted irregularly in comparison to dividend programs