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Supply Chain Financial AnalysisComponents of the Financial Statements:The Income Statement & Balance Sheet21
Many Important Financial Statements Statement of Changes in Financial PositionIncome StatementBalance Sheet10KAnnual ReportEtc. In this segment we will focus on the IncomeStatement and the Balance Sheet3Income Statement Income Statement: The sum of income‐generating transactions over a stated periodof time (sometimes called Statement ofOperations) Revenues (sales, turnover, proceeds)Expenses (cost of goods sold, operating expense,depreciation)Profit (income, gross profit, net profit, EBIT)42
Operating Expense Element: COGS Cost of Goods Sold (or Cost of Sales): Includes the direct costs attributable to the production ofthe products sold by the company; includes the cost of thematerials and the direct labor costs used to produce theproduct Does not include indirect expenses, expenses that are notattributable to specific products, such as distribution costsand sales force costsRef: Investopedia COGS and Cost of Revenue5Operating Expense Element: COGS Cost of Revenue: slightly different than COGS Includes the direct costs attributable to the production ofthe product; includes the cost of the materials and thedirect labor costs used to produce the productAND it includes costs beyond production, such asdistribution and marketingRef: Investopedia COGS and Cost of Revenue63
Operating Expense Elements: SG&A Sales, General and Administration (SG&A) Sales expenses are direct and indirect expensesdirectly linked to the sale of product Includes cost of sales personnel, advertising,promotion, phone, sales expenses General and Administration expenses are thoseexpenses not directly associated with productionor sales of the product Includes wages for non‐sales personnel, cost forutilities, rent, insurance7Operating Expense Element: Other Other: found in various locations Depreciation – accounting for the reduction invalue of a tangible asset, e.g. equipmentAmortization – accounting for the reduction invalue of an intangible asset, e.g. goodwill Goodwill – recorded as an asset on the balance sheet,it is premium paid above book value for an assetusually attributed to band value, IP or reputation Research & Development (R&D)84
Income Statement: Intel 2014Ref.: Intel 2014 Annual Report, p 509Income Statement: General Motors 2014Ref.: https://finance.yahoo.com/q/is?s GM Income Statement&annual105
Balance Sheet Reports the financial condition of assets andliabilities of the business at ONE point in time Assets (something owned of measured value.butnot always material)Liabilities (a claim against the assets)11Balance Sheet Info Assets ALWAYS equal Liabilities When recording asset value, book value isrecorded, not market value There are different methods of valuing inventory(LIFO, FIFO)126
Balance Sheet: Intel 2014Ref.: Intel 2014 Annual Report, p 5213Assets Current Assets ‐ short‐term in nature, liquid assets, can beconverted into cash in the next accounting period Accounts ReceivableInventoryMarketable securitiesPrepaid expenses Long‐term Assets Plant, property, equipmentOther fixed assets‘Goodwill’147
Liabilities Current Liabilities: obligations to be paid in the nextaccounting period Accounts PayableAccrued Expenses – an expense before it is paid (wages, interest inloans, taxes)Notes Payable, Short‐term Bank Debt (line of credit) Long‐term Liabilities Debt (bonds, mortgage) Equity (Owner’s Equity): capital, funding for the firm fromsources other than liabilities Paid‐in‐capital (from initial investments)Retained Earnings (company income)15Supply Chain transactions affect bothIncome Statement and Balance Sheet A company sells a product for 10,000 cash; the product cost 2,000 to produce and deliverHow would this impact the income statement and balancesheet upon delivery?Revenue would increase by 10,000Cost would increase by 2,000Net income would increase by 8,000Cash (Current Asset) would increase by 10,000Inventory (Current Asset) would decrease by 2,000Retained Earnings would increase by 8,000Note: This is a gross simplification of the accounting transactionswhich are not complete; this is for general illustration purposes only.168
Connecting Income Statement and Balance SheetChange in RetainedEarnings (fromBalance Sheet) Net income (fromIncome Statement)This shows a directconnectionbetween the tworeports. 1949‐ 2190 ‐ 241Ref.: Amazon 2014 Annual Report17Key Points189
Key Points The Income Statement provides a summary of theflows in (revenue) and out (expenses) of the firm overa period of time; the net difference between therevenue and expense being the profit or loss of thefirm. The Balance Sheet gives a snapshot of the assets andobligations of the firm at a single moment in time. Together, the Income Statement and Balance Sheetprovide a basic – but not complete – understanding ofthe performance of the firm.19Questions, Comments, Suggestions?Use the Discussion .jrice@mit.edu10
Sources, Image & Reference Information ReferencesAmazon 2014 Annual ReportIntel 2014 Annual ReportGeneral Motors 2014 Annual Report as found athttps://finance.yahoo.com/q/is?s GM Income Statement&annualInvestopedia COGS and Cost of Revenue reference found athttp://www.investopedia.com/terms/c/cogs.aspFor more information on these topics, see:Hawkins, David, Corporate Financial Reporting and Analysis: Text and Cases 3rd ed., Irwin, 1986Higgins, R. Analysis for Financial Management. 10th ed. McGraw‐Hill Irwin, 2011 (or 11th ed., 2015), seeChapter 1Anthony, R.N. and Breitner, L.K. Essentials of Accounting. 10th ed. Prentice Hill, 2009, see pages 1‐66 [thisis a workbook that you should work through, it is not enough just to read it!]Anthony, R.N. and Breitner, L.K. Core Concepts of Accounting. 10th ed. Prentice Hill, 2010, see pages 1‐43[this book provides a summary of the Essentials book, but the reader should go through the Essentialsbook first for complete coverage of the material]2111
2 Many Important Financial Statements Statement of Changes in Financial Position Income Statement Balance Sheet 10K Annual Report Etc. In this segment we will focus on the Income Statement and the Balance Sheet 3 Income Statement Income Statement: The su
