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Financial Accounting

Financial Accounting. Greg Gleeson, CPA, CFA Chief Operating Officer- GROW Partners, LLC ggleeson@growpartnersllc.com. How to think like an Accountant …( esp around Valentine’s Day). Why are Financial Statements Important?. Financial Health of Company Track Record of Management

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Financial Accounting

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  1. Financial Accounting Greg Gleeson, CPA, CFA Chief Operating Officer- GROW Partners, LLC ggleeson@growpartnersllc.com

  2. How to think like an Accountant …(esp around Valentine’s Day)

  3. Why are Financial Statements Important? • Financial Health of Company • Track Record of Management • Independently Audited & Objective • Ease of Comparison Across Companies • Valuation of Company • Starting point for all Financial Analysis

  4. Why are Financial Statements Limited? • Backward Looking • Highly Summarized • Accrual Basis • Non Cash Items (“Stock Options”) • Subjective “One-Time” Charges • Accounting Elections can Make Comparisons Difficult

  5. Do you need CPA to Review and Understand Financial Statements? • Financial Data Providers have Distilled (Bloomberg, Factset, Reuters) many important facts • Financial Ratios provide important information and details, without having to read financials themselves • There are many analysts out there who review info for you …however… • Strong fundamental research requires in-depth review/knowledge of accounting • Ability to review/examine/digest financial statements is a growing area of need in money management (e.g., forensic accounting research, fraud specialization)

  6. Financial Statement Components • Auditors Report • Balance Sheet • Income Statement • Statement of Cash Flows • Statement of Changes in Equity & Retained Earnings • Footnotes • Management Discussion and Analysis • Ratios

  7. Auditors Report • Was an Audit Even Done? • Who are the Auditors? • Was it Prepared in Accordance with GAAP? • Is the Report Unqualified (i.e., Clean) • Is the report Qualified • Has the Firm Changed Audit Firms in Recent Years?

  8. Financial Statement- Balance Sheet • Assets • Current: • Cash/Inventory/Receivables • Non-Current • Fixed Assets • Long term receivables • Intangibles – such as goodwill • Liabilities • Current • Accounts Payable • Non Current • Long-Term Debt • Equity • Capital Raised • Cumulative P&L • Dividends Paid

  9. Accounting Joke…

  10. Financial Statement- Income Statement • Revenues • Accounted for an accrual basis • Cost of good sold (inventory), can greatly distort • Can be subject to management’s estimates of timing • Expenses • Accounted for on an accrual basis • Can be subject management’s estimates of timing • Other (One-time) • Why does the company have one-time charges? • Are “one-time” charges routine at this company?

  11. Accounting Jokes…cont’d

  12. Statement of Cash Flows • Cash Flow From Operations • Translates Accrual Basis to Cash Basis • Cash Flow from Investing Activities • Accounts for “big ticket” items that are typically capitalized • Cash From Financing Activities • Shows the sources of capital raising activities during the period

  13. Statement of Changes in Equity & Retained Earning: • Drills Down the Equity Section of the Balance Sheet • Shows the Roll-Forward of Equity for Various Types of Shareholders (e.g., common, preferred) • Shows if There are Other Minority Owners of Company Out There That You Need to Worry About

  14. Footnotes: Devil’s in the Details… • “Minimum” Color Required by GAAP • Audited • Provides Critical Information to Understand Financial Statements

  15. Ratios: Accounting Shorthand • Reader’s Digest of Financial Statements • Allows for Quick Comparisons against Prior Periods and Peers • Widely Used Ratios can Measure Many Dimensions of Financial Reporting:

  16. Other Information: MD&A • Additional Color Provided by Management • Can be Forward Looking • Unaudited • Can Highlight Items Not in the Financial Statements

  17. Case Study: Cisco (CSCO)

  18. Case Study: Cisco - Balance Sheet Almost $49B in Cash and Growing Low A/R (falling) Leases (increasing) Purchased Companies in Past Took Cash, Haven’t Booked Revs 25% of Company Leveraged Cumulatively, Have Been Profitable Has Healthy Equity

  19. Case Study: Cisco – Income Statement Grew 12% over past 3 years Grew 24% over past 3 years Grew 10% over past 3 years Grew 10% over past 3 years Grew 3.5% over past 3 years Grew 10% over past 3 years Starting Paying Dividend

  20. Case Study: Cisco – Stmt of Cash Flow Collecting Faster than in Past Extending more Credit (leases) More Profitable than P&L Shows Stopped Buying Companies Slowed down Purchasing Own Stock Increasing Dividend

  21. Case Study: Cisco – Footnotes (40 pages worth) Leases grew by 9.5% in 1 year, Faster than revenues…. Past Due Increased by 43% in 1 year

  22. Case Study: Cisco – MD&A (Un-Audited) Provides warning about When Revenues Booked

  23. Case Study: Cisco – Ratios (Unaudited)

  24. CSCO--- Accounting Observations • Generally…Low Valuation in Relation to Other Large Companies • Cash Cow …However… • Earnings Not Growing Very Fast • Net Margins are Not Terrific • Their Cash Flow May decline it they Continue to Lease • Don’t seem to know what to do with their Cash

  25. Epilogue…

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