financial statements 102

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Financial Statements 102Port of Seattle - Goods & Services

September 16, 2021

Pete Miller, Shareholder

[email protected] 425-709-6696

mailto:[email protected]


Table of Contents

How accounting information is used

Financial statement components

What are outside users looking for?

CPA reports on financial statements


Basis of Accounting

The basis used depends on the purpose

• Generally Accepted Accounting Principles (GAAP)

• Federal income tax reporting

• Managerial accounting (internal)

Three common bases/uses of accounting:


Basic Financial Statements

• Based on historical cost

Generally Accepted Accounting Principles (GAAP)

• Balance sheet – a snapshot of a point in time

• Income statement – performance over a period in time

• Statement of changes in owners’ equity

• Statement of cash flows

Four required financial statements


Balance Sheet – What You Have and What You Owe

Reports classes and amounts of assets, liabilities, and owners’ equity

• Fundamental accounting equation: assets = liabilities + owners’ equity

current current

assets liabilities


Income Statement – What was the Score?

Provides accounting measure of revenues earned and costs incurredProduct/service

revenue/costs

Overhead costs

Revenue Less: Cost of good sold (COGS)

Gross Margin/Profit

Less: Selling, general and administrative expenses (SG&A)Less: Depreciation and amortization Less: Other operating expenses

Operating Income (EBIT)

+/- Interest +/- Non-operating income/expense

Pre-Tax Income

+/- Income taxes

NET INCOME


EBITDA


Statement of Changes in Owners’ Equity

Common Stock

Shares Amount

Additional Paid-in Capital

Retained Earnings Total

Balance, January 1 - $ - $ - $ - $ -

Stock issuance xxx $ xxx $ xxx $ - $ xxx

Dividends/distributions - $ - $ - $ (xxx) $ (xxx)

Net income - $ - $ - $ xxx $ xxx

Balance, December 31 - $ - $ - $ - $ -

Presents a “roll forward” of activity in each equity account


Statement of Cash Flows – What Really Happened?

Operations

+ Net income

+ Depreciation and amortization

+/- Other non-cash items (gains/losses)

+/- Change in working capital accounts

+/- Change in other operating activities

= Operating Cash Flows

Financing

- Dividends/distributions

- Payments on long-term debt

+ Proceeds from debt issuance

+/- Stock issuance (buyback)

= Financing Cash Flows

Investing

- Net capital expenditures (“Capex”)

+/- Sale/purchase of investments

+/- Other investing activities

= Investing Cash Flows

Change in Cash on Balance Sheet

+/- Operating cash flows

+/- Investing cash flows

+/- Financing cash flows

= Change in cash on balance sheet

Reporting of cash flows for activity found on both the balance sheet and income statement


Notes and other material

Required supplement to “external financial

statements”

• Greater depth and accounting policies for accounts noted on the financial statements

An integral component of the

financial statements

• Helps tell “the story”

Provides important details about the

company

• Critical information for items not included on the financial statements


Key disclosures

• Description of business and “reporting entity”

• Greater detail of general asset and liability categories

• Details on how revenue is recognized from contracts with your customers

• Terms and maturity of credit and other long-term debt

• Concentrations

• Related-party activity

• Commitments and contingencies

Notes and other material


Tax basis

• Prepared for federal income tax reporting

Internal Revenue Code (IRC)

• Depreciation

• Meals & Entertainment

• Other

“Book” to tax differences


Managerial accounting

• Sometimes you need more than GAAP

Internal reporting

• Variable v. fixed costs

• Contribution margin

• Department/division/project/customer profitability

Other details


Income Statement – how much did we help?

Revenue

Less: Variable costs

Contribution Margin

Less: Operational overhead (fixed costs)

Less: Corporate overhead (fixed costs)

Operating Income


External Users

Banks

Investors

Landlords

Insurance companies


How do BANKS use this information?

• Creditworthiness

• What do they look for?• How profitable is the company?

• How are you using your cash?

• How do they measure it? • Ability to pay bills (current ratio)

• Ability to pay for debt service (fixed charge coverage ratio; debt service coverage ratio)

• Amount of debt (minimum debt to “net worth”, or equity)• Sometimes expressed as a ratio, sometimes as a flat dollar amount



• How do your numbers compare?


What do they REALLY want to know?

Banks want to know that they can be repaid:

• Primary source of repayment = operations

• What is a secondary source of repayment, or maybe even a third

• Collateral

• Personal guarantees by the owner are frequently asked for.

Why is the borrowing necessary?

• Do you need to cover the “cash to cash cycle”?

• Do you need to fund an unprofitable product line?

• Do you need to help buy inventory fueled by growth?

Operating lines of credit

• Often limited to “qualifying” receivables and inventory.

• You may have to “certify” these balances from time to time.

• You may even have to have a “collateral exam” where a bank auditor will come in to make sure these items are accurate.

Banks want to see historic profitability and some forecast of future business as well.

They may also ask for third party verification of your financial statements.


• Base level = tax preparation and internal reporting

• Level of attestation

compilation review AUDIT

CPA’s role in financial statement reporting


CPA’s role in financial statement reporting

Compilation

• Simply preparing the financial statements and notes

• No assurance provided by the CPA

Review

• Inquiries and analytical procedures

• “Limited assurance” provided

Audit

• Also includes:

•Verifying certain information with third parties; customers, banks, attorneys.

•Examination of source documents on a test basis.

•Study of internal controls

• “Reasonable Assurance” provided

Expectation gap

financial statements 102

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