financial statement analysis extractions (pt3 of exam 2)

Income statement extraction, what do you want to get?

Net income

Operating revenues

money received from services or products sold by the company.

usually revenues or sales

operating expenses

expenses relatable to the operations of the company

• COGS

• SGA

• D&A

• R&D

COGS

It represents the direct costs a company incurs to produce the goods or services it sells.

SGA

Non production or nonservice relared costs but still are still important to running the business

advertising, legal, accounting, etc.

D&A

Both are non-cash expenses that spread the cost of an asset over its useful life.

• Depreciation applies to tangible assets like machinery, buildings, and equipment.

• Amortization applies to intangible assets like patents, software, and certain acquired customer relationships.

R&D

It represents the money a company spends to create new products, improve existing products, or develop new technology

• research, testing, developing, etc.

OTHER REVENUES AND EXPENSES

• interest income/expense net

  • interest revenue - interest expense

• other income or nonoperating income

  • Gains and losses

interest revenue

revenue of interest associated with debt or financial leases the company provides to customers or other companies.

interest expense

cost of intrest associated with debt or financial leases

other income or non operating income

income from other revenues and expenses that are not affiliated with the operations of the business.

• this includes GAINS AND LOSSES

TAXATION EXPENSES

tax expense, can also be labeled as provisions for income taxes, corporate income taxes, income tax, or income tax expense

miscallenous post tax revenues and expenses

• discontinued operations and extraordinary items

• non-controlling interest in earnings or minority interest in earnings

• preferred stock dividends

Discontinued operations

Discontinued operations are parts of a business that a company has sold, shut down, or plans to dispose of, when that disposal represents a major strategic shift.

For example, if a company owns a retail division and decides to sell the entire division, the profit or loss from that division may be reported separately as discontinued operations.

extraoridnary items

Extraordinary items are an older accounting concept referring to gains or losses that were both unusual and infrequent, such as certain major disasters or exceptional events.

non-controlling interest in earnings or minority interest in earnings

Non-controlling interest in earnings or minority interest in earnings is the portion of a subsidiary’s profit that belongs to shareholders other than the parent company.

Statement of cash flows extraction

Depreciation and amortization expense, capital expenditures, net, and dividends paid

depreciation and amortization expense

depreciation of PPE and amortization of intangible assets

what is considered in capital expenditures?

cash used in the procurement or value adding enhancements/repairs of long term assets like PPE, aquisitions, purchase of intangibles, proceeds from divestitures or disposal of assets, etc.

what should not be considered on capital expenditures?

investments in financial securities, proceeds from financial securities. other, net

dividends paid

cash outflow to common shareholders as payments.

common dividends, cash dividends paid, dividends to shareholders

Balance sheet extractions - current assets

• cash & cash equivalents

• accounts receivables

• inventory

• other current assets

what is considered cash?

cash, short term investments (marketable securities!!) that mature in less than 90 days, any other demand deposits with banks or financial institutions or any other accounts with that characteristic

what is inconsidered cash equivalents?

short term, highly liquidated investments that are readily convertible to known amounts of cash, and are near maturity (3 months or less)

examples of cash & cash equivalents

t-Bills, commercial paper, money market funds, federal funds sold that are bought 3 months before its maturity.

A T-bill bought 3 years ago with a maturity in 3 months is not considered a cash equivalent because it was bought 3 years ago.

ACCOUNTS RECEIVABLES

• A/R

• Notes receivables

A/R

credit sales, all accrual assets marked by term “receivables”, meaning goods are sold on credit and cash payment is expected

notes receivables

written promises from customers or other parties to pay a specific amount of money by a specific future date. when the party is financing its product/service.

INVENTORY

• Raw materials, Works in progress (WIP), finished goods

• any items hels for sale in the ordinary course of business, in process of production for such sale, or to be currently consumed in the production of goods or services.

other current assets

other current assets, prepaid expenses

what does other current assets mean

any miscallenous assets that could be transformed into cash within 1 year

prepaid expenses

cash payments made ahead of time that benefits beyond the current period. (ex: prepaid rent and prepaid insurance, also prepaid tax or employee payroll taxes)

BALANCE SHEET EXTRACTIONS - LONG TERM ASSETS

• PPE

• INVESTMENTS

• INTANGIBLES

Whats included in PPE??

• Any PPE

• Accumulated depreciation (decline in assets since purchase)

• ANY RIGHT OF USE ASSET, OPERATIONAL, financial, etc. ASSET is used FOR OPERATIONS. ANYTHING

Whats included in INVESTMENTS

Investments - any financial securities held by the company

Digital assets - like crypto, it’s non current

Whats included in intangibles

Patents, copywrites, trademarks, and trade-secrets - ownership based intangible assets.

Goodwill - difference in value that arises through business acquisitions that occurs when book value of acquired company’s asset is less than fair value

what is considered other assets? NOT OTHER CURRENT ASSETS

other long term receuvables, financial receivables, equity in net assets of nonconsolidated affiliates, deffered income taxes

• anything that isn’t PPE, investments, or intangibles

BALANCE SHEET EXTRACTION - CURRENT LIABILITIES

• current liabilities

• other liabilities

• common equity

• other equity

what is included in Current liabilities

• accrual liabilities - any value that is owed but has not been paid yet.

  • A/P, wages payable, income taxes payable, interest payable, dividends payable, any payables

• other current liabilities - any miscellaneous liabilities that could require cash within 1 year

  • Sales taxes payable

• current debt - debt due within 1 year

  • short term debt, notes payable, CURRENT portion/maturities of long term debt, short term borrowings, ANYTHING TO DO WITH OPERATING LEASE LIABILITIES OR LEASE OBLIGATIONS

BALANCE SHEET EXTRACTION - OTHER LIABILITIES (long term)

• long term debt

  • Long term debt, notes payable, ANY LEASE LIABILITIES OR OBLIGATIONS >1 year

• other liabilities

  • Deferred Taxes

  • Deffered revenues

what is long term debt?

long term debt, notes payable >1 year, ANY LEASE LIABILITIES OR OBLIGATIONS >1 year

what is other liabilities?

deferred taxes - income tax payables due beyond a year

deferred revenue - payments that have been received and represent future commitments.

BALANCE SHEET EXTRACTION - COMMON EQUITY

• Paid in common capital

• retained earnings, net

whats in paid in common capital?

• common stock at par

• additional paid in capital - sum of total cash received in excess of par from issuance of shares, also known as additional capital or surplus

• Common stock in Treasury

retained earnings, net

retained earnings - accumulated other comprehensive income or loss

BALANCE SHEET EXTRACTION - OTHER EQUITY

• preferred stock

• noncontrolling interests (minority interests)

how do i calculate noncontrolling interest?

noncontrolling interest + redeemable noncontrolling interest

Core operating assets

assets of the company associated with sales and services to its customers.

Net operating assets equation

total debt + total equity

total equity equals…

common + other equity

accrued accounts

accounting records used to track revenues earned or expenses incurred before any cash changes hands and before invoice is sent

accrued expenses

costs incurred before receiving an invoice or paying cash (not paid yet, just estimated)

no invoice received yet.

accrued revenues

income earned by service or goods before payment arrives

different from A/R because invoice is not yet sent.

what type of net income should be used in equity valuation?

net income attributable to common stakeholders