Module 1: Basics of Financial Statements

Balance Sheet Equation Assets: companies own cash, receivables, inventories, real estate, equipment, securities, and intangibles—must have future value to the company Liabilities: Companies’ obligations to employees, suppliers, governments, bankers, lenders, bondholders Equity: The owners’ remaining investment in the company

Balance Sheet Equation Balance Sheet: Everything a company owns was purchased with money from creditors or owners. Who owns what? Company owns the assets Investors (owners) purchase shares of stock in the company, including a share of earnings Creditors own promises of future payment from companies

Financial Statements FINANCIAL STATEMENTS INCLUDE: Balance Sheet: List of assets, obligations, and owners’ equity on a date. Income Statement: Change in owners’ equity due to operating the business. Revenues, expenses, profits, and losses=net income Cash Flows: Change in cash balance due to (1) operating the business, (2) buying or selling long-term assets, and (3) financing the company (cash flows to/from lenders and owners). Stockholders’ Equity: Change in owners’ accounts from beginning of the period to end of the period.

Financial Accounting Information DEMAND: Who needs to know about the finances of companies? Almost everyone! DEMAND: Who needs to know about the finances of companies? Almost everyone! Managers, employees, investment analysts, shareholders and directors, customers, regulators and tax agencies, voters and their representatives… Managers, employees, investment analysts, shareholders and directors, customers, regulators and tax agencies, voters and their representatives… However, readers must be knowledgeable before they can understand financial reports because they are written in the language of business. However, readers must be knowledgeable before they can understand financial reports because they are written in the language of business. Accounting provides the language. Accounting provides the language.

Supply of Accounting Information SEC filing requirements: SEC filing requirements: Form 10-K: annual report Form 10-Q: quarterly Form 8-K: additional Benefits of disclosure. Benefits of disclosure. Lower costs of funds because reliable information supports trust in the company Lower costs of funds because reliable information supports trust in the company Increases stock prices overall, reduces risk Increases stock prices overall, reduces risk Costs of disclosure. Costs of disclosure. Preparation and dissemination, competitive disadvantages, litigation potential, and political costs Preparation and dissemination, competitive disadvantages, litigation potential, and political costs

Berkshire Hathaway’s Balance Sheet

Berkshire Hathaway’s Income Statement

Berkshire Hathaway’s Statement of Stockholders’ Equity

Statement of Cash Flows The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time. The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.

Information Related to Financial Statements Management Discussion and Analysis Management Discussion and Analysis Independent Auditor’s Report Independent Auditor’s Report Financial Statement Footnotes Financial Statement Footnotes Report on Internal Controls Report on Internal Controls

Profitability Analysis

Oversight of Financial Accounting SEC oversees all publicly traded companies SEC oversees all publicly traded companies Financial Accounting Standards Board (FASB) and has delegated authority from SEC Financial Accounting Standards Board (FASB) and has delegated authority from SEC Congress and federal courts can overrule the SEC or the FASB Congress and federal courts can overrule the SEC or the FASB