1. Reporting Performance Income Statement and Statement of Cash Flow

2. Balance Sheet shows where I am now Balance Sheet shows where I was Cash Flow explains how cash changed Assets Liabilities & Equity Cash Cash Flow Statement Assets Liabilities & Equity Cash Income Statement shows how I got there Income Statement

3. Income Statement Income Statement: measures performance over a certain period of time Compares inflows (“Revenue” or “Sales”) with outflows (“Costs” or “Expenses”) Revenue – Expenses = Net Income

4. Financial Statements

5. Personal Income Statement

6. Business Income Statement A business income statement reports on operating and non-operating activities. It lists amounts for revenues less expenses over a period of time. Sales less expenses yield the “bottom-line” net income amount.

7. Income Statement Components Revenues: value received from the exchange of goods or services to customers Expenses: cost of doing business; assets and resources used to provide those revenues Net income: revenues less the expenses associated with getting those revenues

8. 80

12. 80

13. 80 EBITDA Earnings before Interest, Taxes, Depreciation & Amortization Measures operating results before costs of capital structure and taxes

14. EBITDA Example Two Companies exactly the same: Revenue Products Customers Industry Employees Net Income: Company A $200 Company B $ 20

15. EBITDA Example AB Revenue 1000 1000 Expenses 980 780 Net Income 20 220 Interest 120 10 Tax 60 10 Depreciation / Amortization 50 10 EBITDA 250 250 14

17. Accrual Accounting Assets, liabilities, revenues, and expenses are put on the financial statements when the transaction that causes them occurs, not when cash is paid or received. Cash may be paid or received at same time, but this has NOTHING to do with when the info goes on the financial statements Required by GAAP.

18. Accrual Basis Revenues are earned and recorded when goods or services are provided to customers Expenses are incurred and recorded when the resources are used to create the goods and services provided to the customer The matching principle requires that expenses be recorded in the same period as the associated revenue, NOT the period in which they are paid

19. ExerciseBig and Rich Hats LLC - 2008 Buys hats from suppliers: value of $175k $25k paid in 2008, balance on credit Sells goods to customers: invoice value of $200k Received $150k in cash Remainder to be paid in 2009

20. Big and Rich Performance 19

21. Big and Rich Performance 20

22. Revenue Recognition Rules in GAAP …often lots of judgment in determining revenue Revenue is recognized when all conditions are met: Persuasive evidence of an arrangement exists Delivery of products or services has occurred Price is fixed and determinable Collection is reasonably assured

23. Revenue Recognition Rules in GAAP …often lots of judgment in determining revenue Revenue is recognized when all conditions are met: Persuasive evidence of an arrangement exists Delivery of products or services has occurred Price is fixed and determinable Collection is reasonably assured

25. 24 85 – 88

26. 25 87

27. Revenue Games ExerciseBlue Train Computer Corp. List Price: Hardware $20 Software License $1 / month Full Maintenance $2 / month Mingus Inc. purchases system for $20; includes 3 months of software license and 1 month warranty “Irrevocable” contract signed Nov 24. 2009: $5 non refundable deposit with contract $5 per month Jan 2010 – Mar 2010 If no pay, only recourse is take back hardware Dec 31, 2009: ½ hardware delivered Jan 31, 2010: ½ hardware delivered Feb 28, 2010: software delivered Mar 31, 2010: system up and running 26

28. Percentage-of-Completion For certain industries requiring long-term contacts, revenue is by determining the costs incurred to date compared with the project’s total expected costs. Percentage-of-completion method requires an estimate of total anticipated costs. This estimate is made at the beginning of the contract and is used to initially bid the contract.

29. Percentage-of-Completion 2005 10-K report footnotes of Raytheon Company:

30. Unearned Revenue Deposits from customers are liability until service obligation is fulfilled

31. Expense Rules in GAAP Once revenue is determined, then expenses are recorded The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue

32. Expense Rules in GAAP Once revenue is determined, then expenses are recorded The matching principle requires that expenses be recorded in the period in which they are incurred to generate the revenue …even more judgment in expenses

33. Accrual-Based Measurement of Expenses If benefit is for current period, report the cost as… Expense As the benefits are used up, reduce the asset and report this cost as… If benefit extends to future periods, initially report the cost as… Asset A capitalized cost is the cost that is reported as an asset on the balance sheet. Company incurs a cost.

34. 80

35. 34 95

36. Earnings Per Share

37. 36 102 – 103