Introduction to Financial Reports

• Purpose: Financial reports are shared by publicly traded companies to provide insight into their financial performance and health.
• Types of Financial Reports:
  • 10-K: Annual report filed every fiscal year.
  • 10-Q: Quarterly report filed every fiscal quarter.
  • 8-K: Filed for significant events (e.g., mergers, acquisitions, or major corporate changes).
  • S-1: Filed when a company plans an Initial Public Offering (IPO) to register securities.
• Three Core Financial Statements:
  • Income Statement: Shows revenues, expenses, and net income over a period.
  • Cash Flow Statement: Tracks cash inflows and outflows, reconciling net income to cash changes.
  • Balance Sheet: Snapshot of assets, liabilities, and equity at a specific point in time.
• Why Three Statements?:
  • Net income (from Income Statement) differs from cash generated (Cash Flow Statement).
  • Changes in cash and net income update the Balance Sheet.
  • Together, they provide a holistic view of a company’s financial condition.

Income Statement

• Overview:
  • Measures operating performance over a period (e.g., quarter or year).
  • Based on accrual accounting: Revenues and expenses are recorded when transactions occur, not when cash changes hands.
• Purpose:
  • Analyzes growth, cost structure, and profitability.
  • Identifies drivers of net earnings.
• Key Line Items:
  • Revenue: Total payment for goods/services over a period.
  • Cost of Goods Sold (COGS): Direct costs of producing goods/services sold.
  • Gross Profit: Revenue - COGS.
  • Selling, General & Administrative (SG&A): Operating costs not tied to production (e.g., payroll, marketing).
  • Research & Development (R&D): Costs for developing new products/procedures.
  • EBITDA: Earnings Before Interest, Taxes, Depreciation, & Amortization (Gross Profit - SG&A - R&D).
  • Depreciation & Amortization (D&A): Allocation of fixed asset costs over their useful life.
  • Operating Profit (EBIT): EBITDA - D&A.
  • Interest Expense/Income: Costs of debt or income from investments.
  • Unusual/Infrequent Items: Non-recurring gains/losses (e.g., asset sales, write-offs).
  • Earnings Before Tax (EBT): EBIT - Net Interest Expense.
  • Income Tax Expense: EBT × Tax Rate.
  • Net Income: EBT - Tax.
  • Earnings Per Share (EPS):
    • Basic EPS: Net Income / Basic Weighted Average Shares.
    • Diluted EPS: Net Income / Diluted Weighted Average Shares.
• Example: Nike FY 2020 Income Statement shows revenue of $37,403M, net income of $2,539M, and diluted EPS of $1.60.

Balance Sheet

• Overview:
  • Snapshot of financial position at a specific date (e.g., end of fiscal year/quarter).
  • Based on the Fundamental Accounting Equation: Assets = Liabilities + Shareholders’ Equity.
• Purpose:
  • Shows how assets are financed (debt or equity).
• Key Components:
  • Assets:
    • Short-Term:
      • Cash: Money in bank accounts.
      • Marketable Securities: Debt/equity securities held.
      • Accounts Receivable (A/R): Payments owed by customers.
      • Inventories: Goods awaiting sale and production costs.
      • Prepaid Expenses: Prepayments for future services (e.g., rent).
    • Long-Term:
      • Property, Plant & Equipment (PP&E): Land, buildings, machinery.
      • Intangible Assets & Goodwill: Patents, trademarks, acquired value.
  • Liabilities:
    • Short-Term:
      • Accounts Payable (A/P): Money owed to suppliers.
      • Deferred Revenue: Payments received for undelivered goods/services.
      • Accrued Expenses: Incurred but unpaid expenses.
      • Short-Term Debt: Debt due within a year.
    • Long-Term:
      • Long-Term Debt: Debt due beyond a year.
  • Shareholders’ Equity:
    • Preferred Stock: Stock with priority over common stock.
    • Common Stock: Capital from issued shares.
    • Treasury Stock: Reacquired common stock (negative value).
    • Retained Earnings: Cumulative earnings minus dividends.
• Example: Nike FY 2020 Balance Sheet (incomplete in document).

Cash Flow Statement

• Overview:
  • Reconciles net income (accrual-based) to actual cash changes over a period.
  • Divided into three sections: Operations, Investing, Financing.
• Purpose:
  • Critical for assessing financial health (“cash is king”).
  • Shows operating performance, investments, and financing changes.
• Sections:
  • Cash Flow from Operations (CFO):
    • Starts with Net Income.
    • Adjustments:
      • Add back D&A (non-cash).
      • Add back other non-cash items (e.g., stock-based compensation).
      • Adjust for Changes in Net Working Capital:
        • Assets (e.g., A/R, Inventory): Increases = outflows, Decreases = inflows.
        • Liabilities (e.g., A/P, Deferred Revenue): Increases = inflows, Decreases = outflows.
  • Cash Flow from Investing (CFI):
    • Capital Expenditures (CapEx): Spending on fixed assets.
    • Purchases/Sales of Investments: Marketable securities transactions.
    • Purchases of Intangibles: Intellectual property costs.
    • Proceeds from Asset Sales: Cash from selling fixed assets.
    • Example: Nike FY 2020 CFI = -$1,028M.
  • Cash Flow from Financing (CFF):
• Net Change in Cash: Flows to update Balance Sheet cash balance.