1. Linking Financial Statements to Corporate Strategy
2016 ACC Annual Meeting
Linking Financial Statements to Corporate Strategy
Eddie Riedl
October 19, 2016

2. What is Accounting? First impressions:
dated info, irrelevant, boring, bean-counters
It is story-telling.
My thesis: accounting is corporate story-telling.
If you can read the financial statements, you can see the story.

3. Let Us Start at the Beginning . . .
There are three primary financial statements:
BALANCE
SHEET
INCOME STATEMENT
STATEMENT OF
CASH FLOWS

4. Let Us Start at the Beginning . . .
There are three primary financial statements:
BALANCE
SHEET
INCOME STATEMENT
STATEMENT OF
CASH FLOWS

5. Balance Sheet = Assets Liabilities Equity
Lists assets, liabilities, and equity as of a certain point in time (quarter/year end)
Assets
Liabilities
Current Liabilities (<1 year)
Noncurrent Liabilities (>1 year)
Current Assets (<1 year)
Noncurrent Assets (>1 year) =
Equity
Broadly
captures firm’s operations
captures firm’s financing
Asset Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events
Liability Probable future economic sacrifices arising from present obligations to transfer assets or provide services to other entities as a result of past transactions or events
Equity Residual interest in the assets of an entity after subtracting liabilities

6. Let Us Start at the Beginning . . .
There are three primary financial statements:
BALANCE
SHEET
INCOME STATEMENT
STATEMENT OF
CASH FLOWS

7. Income Statement
Captures economic inflows (revenues) and outflows (expenses) to the firm on an accrual-basis over a period of time
Revenues
Transactions increasing the value of the firm
Expenses
Transactions decreasing the value of the firm:
- Cost of goods sold
- SG&A (selling, general, and admin)
- Litigation settlements
Change in economic value of firm
(on an accrual basis)
Net Income

8. Income Statement
Captures economic inflows (revenues) and outflows (expenses) to the firm on an accrual-basis over a period of time
Revenues
We distinguish between revenues/expenses that are
recurring
Revenues: sales of manufactured goods
Expense: salaries
non-recurring
Revenues: gain on sale of business
Expenses: litigation settlement
Expenses
There are many “performance” measures
Net Income
This is the “official” GAAP
(“generally accepted accounting principles”)
Pro Forma
EBIT, EBITDA, etc.
Net Income

9. Let Us Start at the Beginning . . .
There are three primary financial statements:
BALANCE
SHEET
INCOME STATEMENT
STATEMENT OF
CASH FLOWS

10. Statement of Cash Flows
Captures changes in a firm’s cash over a period of time due to operating, investing, and financing activities
Operating
Cash inflows and outflows from firm’s
operating activities
broadly, changes in current assets and liabilities
Cash inflows and outflows from firm’s investing activities
broadly, changes in noncurrent assets
Investing
Financing
Cash inflows and outflows from firm’s
financing activities
broadly, changes in noncurrent liabilities and equity
Net change in cash

11. A Tale of Two Firms . . .
Let’s see if financial statements really tell us about strategy
Major competitors. Same industry. Both S&P 500 firms.
So they’re similar companies, right?
Let’s see what the financial statements tell us roll back the clocks to 2011

12. Assets =
$73,535
Liabilities
Equity
$73,535

13. Distinguish between Current and Non-current
Current Assets
Noncurrent Assets
Distinguish between Current and Non-current
Current Liabilities
Noncurrent Liab

14. Lots of cash $28,848 Lots of intangible assets $29,413
Cash + Intangibles:
79% of
Total Assets
Lots of intangible
assets
$29,413
Limited Liabilities
$33,290

15. Revenue
$35,622
R&D
$4,519
Net Income
$8,547

16. So, what is Oracle’s “story”?
Operating Strategy
Acquisition-driven
high intangible assets 40%
(29,413 / 73,535)
High-end products
R&D: 13% of revenue
( 4,519 / 35,622)
Profitable: 24% profit margin
( 8,547 / 35,622)
Financing Strategy
Lots of cash – why? Acquisitions!
39% of total asset
(28,848 / 73,535)
Moderate leverage
83% liabilities/equity ratio
(33,290 / 40,245)

17. Assets =
$116,433
Liabilities
Equity
$116,433

18. Substantial Liabilities
Some cash
$23,401
Customer Financing
$29,104
Some intangibles
$29,405
Substantial Liabilities
$96,197

19. Revenue
$106,916
R&D
$6,258
Net Income
$15,855

20. So, what is IBM’s “story”?
Operating Strategy
Some acquisitions
intangible assets 25%
(29,605 / 116,443)
High-end products
R&D: 6% of revenue
( 6,258 / 106,916)
Profitable: 15% profit margin
(15,855 / 106,916)
Financing Strategy
Provide customer financing
35% of total asset
(40,337 / 116,443)
High leverage
575% liabilities/equity
(116,433 / 20,236)

21. Are these similar companies? Less than you think . . .
Operating Strategy
Acquisition-driven
high intangible assets 40%
(29,413 / 73,535)
High-end products
R&D: 13% of revenue
( 4,519 / 35,622)
Profitable: 24% profit margin
( 8,547 / 35,622)
Financing Strategy
Lots of cash – why? Acquisitions!
39% of total asset
(28,848 / 73,535)
Moderate leverage
83% liabilities/equity ratio
(33,290 / 40,245)
Operating Strategy
Some acquisitions
intangible assets 25%
(29,605 / 116,443)
High-end products
R&D: 6% of revenue
( 6,258 / 106,916)
Profitable: 15% profit margin
(15,855 / 106,916)
Financing Strategy
Provide customer financing
35% of total asset
(40,337 / 116,443)
High leverage
575% liabilities/equity
(116,433 / 20,236)

22. Want to See More? Some 3-day Programs at Boston University
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learn the strategic dimensions of project management
For more information:

23. X What is Accounting? First impressions:
dated info, irrelevant, boring, bean-counters
It is story-telling.
My thesis: accounting is corporate story-telling.
If you can read the financial statements, you can see the story.

24. Thank You!