Some Very Basic Info on Corporations and Stocks Part II Mr. Leavins, BCHS

1. What are three major reports that measure the financial condition of business firms, including corporations? The Balance Sheet The Income Statement The Statement of Cash Flows The Statement of Cash Flows is sometimes called the Sources and Applications of Funds Statement

2. What are the three major components of the Balance Sheet? Assets Liabilities Owners’ Equity

3. What are Assets, Liabilities, and Owners’ Equity? An asset is anything that is owned by the company Assets can be tangible (e.g. drill press, land) or intangible ( a copyright, a license, membership, money owed to the company by others ) On a Balance Sheet, assets are expressed as a monetary value (e.g. Factory building, $1,000,000) A liability is anything the company owes (obligated to pay) to outside parties and/or employees Think of liabilities as a negative against the monetary value of a company’s assets Owners’ Equity is the company owners’ financial claim on the assets of the company Think of Owners’ Equity as essentially the Net Worth of the company at a given point in time.

4. Regarding Accounting and the Balance Sheet, what does ALOE mean? ALOE is the Basic Accounting Equation, and is expressed in the next bullet point Assets = Liabilities + Owners’ Equity (This is the basic accounting equation) The Basic Accounting Equation can also be expressed as: Assets – Liabilities = Owners’ Equity You could also say the following: Assets – Liabilities = The Net Worth of the Company A company will have a negative Owner’s Equity if a company’s liabilities are larger than the company’s assets A negative owners’ equity is the same thing as having negative net worth Oh yeah, this would also be true for an individual if his/her liabilities exceed his/her assets. This person would have a negative net worth. Many recent college graduates have negative net worth due to student debt.

5. How does ALOE play out on the Balance Sheet? Assets reside on the left side of the Balance Sheet Liabilities reside on the right side of the Balance Sheet Owners’ Equity resides on the right side of the Balance Sheet A = L + OE

6. What are some other expressions of the ALOE Basic Accounting Equation? Assets > Liabilities = Positive Owners’ Equity Liabilities > Assets = Negative Owner’s Equity Assets > Liabilities = Positive Net Worth Liabilities > Assets = Negative Net Worth

7. What is another synonym of Owners’ Equity as it pertains to the ALOE Basic Accounting Equation? Assets – Liabilities = Book Value Remember: Assets – Liabilities = Owners’ Equity in the Company Remember: Assets – Liabilities = Net Worth of the Company Remember: Assets – Liabilities = Book Value of the Company

8. How should we regard a company’s Book Value? Think of Book Value as the net value of a company’s assets if the company were to go out of business today and assets were sold, and all liabilities were paid off To put it another way, the Book Value of a company would be what is left over after we sell all of the company assets, and after we pay off all of the company’s liabilities To put it in Alabama terms, “Book Value is the money you got left over if you done went out and sold all the stuff, and paid off them folks you owe money to.” The book value of a company gives you insight into what the “break-up” value of the company is Book value alone doesn’t necessarily give you much insight into the future financial potential of the company, however

9. What does the Income Statement measure? Fundamentally, the Income Statement measures Revenue minus Expenses to calculate the company’s net income (profits) Revenue is essentially money earned via the operations of the business Revenue is the top line of the income statement Expenses are subtracted from Revenues to determine whether the company earned income (profit) or a loss (negative income) The income statements often measure gross income, operating income, and net income.

10. What is Gross Income? Revenue – Cost of Goods Sold (COGS) = Gross Income (Gross Profit) $1,000,000 (Revenue) - $400,000 (COGS) = $600,000 (Gross Income) Cost of Goods Sold (COGS) are the costs directly associated with the sales of the goods (or services) carried out by the company Closely associated with gross income is the concept of gross margin, a percentage measurement of gross profit Gross Income / Revenue = Gross Margin $600,000 / $1,000,000 = 60% (Gross Margin)

11. What is Operating Income? Operating Income (operating profit) measures the difference between Revenue minus cost of goods sold and other expenses involved in the operation of the company Revenue – COGS and Operating Expenses = Operating Income (Operating Profit) Operating Income is also known as “Earnings Before Interest and Taxes”

12. What is Net Income? Revenue – Cost of Goods Sold = Gross Income Gross Income – Other Operating Expenses = Operating Income Operating Income – Interest Expenses and Taxes = Net Income Net Income is the BOTTOM LINE of the Income Statement, and the final measurement of the profitability of the company during a given time period Net Income is can also be seen as the bottom line EARNINGS of the company during a certain period of time (e.g. Quarterly, Annually)

13. What is a Statement of Cash Flows? A Statement of Cash Flows measures