Financial Statements

1
Financial Statements

• The Income Statement

Crow River Investment Club www.bivio.com/crowrive
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2
Introduction to this Series

• This is first of 4 short overviews
• 3 Main Financial Statements
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Finally, Annual Report Worksheets
• By Bob Adams
• By Paul Schneider

3
Income Statement The Basics

• Financial analysis is about Comparison. Thats
  why these statements all come with more than one
  year of data.
• 2. The Income Statement (or Profit Loss
  Statement) reports the income, expenses and
  profits for a specific period of time.

4
Income Statement The Basics

• 3. Product Companies report Net Sales
• 4. Service Companies report Net Revenues.
• 5. Net Sales Revenues are the same thing.
• 6. Net means after the return of defective
  products.

5
Income Statement The Basics

• 7. Everything on the Income Statement can be
  expressed as a percentage and compared to
  competitive companies.
• 8. Everything on the Income Statement can be
  compared as a percentage to Net Sales or
  Revenues.

6
Income Statement The Basics

• 9. Companies are valued based on the cash
  produced from core operations (or Operating
  Income).
• 10. Focus your attention on the core business.
  What business is the company in? How much money
  did that business generate or cost?

7
Income Statement The Basics

• 11. Finally, be aware of income and expenses that
  are not generated from the core business.
• 12.If a company restructures, or takes one-time
  gains and losses annually, they are no longer
  one time, are they??

8
The Anatomy of an Income Statement

• Net Sales or Revenues
• Cost of Goods Sold
• Gross Profit
• Gross Profit divided by Sales
• Gross Margin, the percentage of every dollar it
  costs to produce sales.

9
Comparing Business Models

• Lets compare Mentor (MNTR) with Factset (FDS)
  2002 annual figures
• MNTR FDS
• Net Sales 321,062 205,853
• Cost of Sales 130,455 67,947
• Gross Profit 190,607 137,906
• Gross Margin 59 67
• Which one has a more profitable
• business model?

10
Whats Next?

• Other Operating Expenses, such as
• Utilities
• Labor Costs
• Advertising
• Then, Other Income Expenses, such as
• Short-term Investments
• Royalties on Patents
• Payment on a Lawsuit
• Foreign Exchange Rate deficit
• Interest Income Expenses

11
The Anatomy of an Income Statement

• SO
• Gross Profit
• SGA Expenses
• Other Income
• Other Expenses
• Income Before Income Taxes
• This is an important SSG figure!

12
Taxes?

• Why do we look at pre-tax income?
• Companies have no control over taxes
• Taxes vary from state to state
• Taxes dont show the true picture
• Various industries are taxed differently
• Tax credits skew year-to-year earnings
• Taxes have their own line on the Income
  Statement.

13
The Anatomy of an Income Statement

• So
• Income Before Taxes
• Provision for Income Taxes
• Net Income

14
The Anatomy of an Income Statement

• And
• Net Income divided by Shares Outstanding
  Earnings Per Share or EPS
• Diluted Earnings Per Share
• The value of each share after the effects of
  stock options and convertible shares and bonds
  have been taken into consideration.

15
Income Statement Ratios

• Which Ratios are Important?
• Gross Margin
• Sales Cost of Sales div. by Sales
• How profitable is this business model?
• Is it more profitable than its peers?
• Is it getting more profitable from year-to-year?

16
Income Statement Ratios

• Which Ratios are Important?
• Net Margin
• Net Income divided by Net Sales
• Is there any money left over for the shareholders
  after all expenses and taxes are paid?
• Is Net Margin growing from year-to-year?
• How does it compare to its competitors?

17
Income Statement the SSG

• Sales
• - Cost of Goods Sold
• - SGA Expense
• Other Income
• - Other Expenses
• Income Before Taxes
• Income Taxes
• Net Income (div. by Shares Outstanding)
• Earnings Per Share (EPS)

These are the items required on the Quarterly
Data Update Screen PERT Report
18
A Quick Look at FactSet

• 2002 2001 Change
• Commissions 62,196 56,462 10
• Cash Fees 143,657 120,226 19
• Total Revenue 205,853 176,688 16.5
• Cost of Services 67,947 61,576 10
• SGA Expenses 75,084 64,209 17
• Total Op. Expenses 143,935 125,785 14
• Net Income 40,848 33,401 22
• Diluted EPS 1.17 .96 22
• Shares Outstanding 34,862 34762
  0

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A Quick Look at FactSet

• 2002 2001
• Total Revenue 205,853 176,688
• - Cost of Services 67,947 61,576
• 137,906 115,112
• Div. By Revenues
• Gross Margin 67 65
• Net Income 40,848 33,401
• Div. By Revenue 205,853 176,688
• Net Margin 19.8 18.9
• Are they getting better!!?

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Next Month The Balance Sheet

• The End