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Alan Kring Productions and Associations with Emergent Light Studio presents the Illinois

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State Collegiate Compendium, academic lectures in Business and Economics.

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This is Business Finance, FIL 190 for spring semester 2024.

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Today, corporate accounting statements and there's some important information in this.

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And I think I've already asked this, are you have taken FIL, accounting 131?

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Have you?

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Okay.

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Well, I'm going to rely on that a little bit, but we take a very different approach.

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And yeah, person.

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We'll get to that in a little bit here, but as always, we're going to have a look at the

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numbers today.

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There we go.

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Get the projector fired up.

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But again, get your group formed today.

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And then next week, I will lay out the framework of the term assignment for you.

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And just as a direct statement about it, there are several places I use and I can have you

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use to generate low level artificial intelligence prompts.

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And one of those, some of them are for pay.

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And I'm trying to avoid having you eat too much feed this time.

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And I have found a good one thanks to our teaching assistant that's okay as well.

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Yeah.

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If we already have GPT-4, can we use that?

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If you have it, yes.

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But you are going to be submitting the prompt.

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Well, let me be a little more general about it.

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You will be submitting to me as part of the project your proposed creation narrative.

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And then I will redirect you to make some changes so that you are not going to use one

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that's already in the stack somewhere to make sure that it is a fully customized chat for

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yourself.

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But your group will work together in a team to develop it and to test it and to revise

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it if necessary.

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And remember that you will provide me with a preliminary, your final, what you are going

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to put in to create it as at the midterm right after the break.

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I think I'm going to make it.

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And then you will have time over the next, the last half of the semester to refine it,

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to test it against what you are learning in this class.

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So in other words, you're going to be the adversary to make sure that when it gives

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you answers, those are the correct answers to the questions.

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Because at the end of this, you will present to the class and I will throw questions at

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each group.

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And they will show what they get from the GPT that they have created.

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So you're having a chance to build it, develop it, and get an understanding of what comes

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out for what you put in.

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You're not going to be able to just do lol text messaging, types of English language,

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and all that.

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Every word, every sentence structure you use can impact on the quality of the product that's

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coming out.

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And remember, this is the very lowest of artificial intelligence.

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What's already out there now is just almost scary.

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But anyway, let's have a look at our numbers today and get back down to earth.

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By the way, I have a good lol here.

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Let me see if I can, well I'll find that in a minute here.

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But as you can see, well no, it's your turn.

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Is this a bold day or a bare day?

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A bare day.

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Yeah, it's actually kind of a noticeable bare day.

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I mean, it is, oddly, you see the Dow started up, heaven knows why, but then the bears just

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came climbing in, but the bulls started grabbing what they saw as bargains there.

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So it's going to be a kind of volatile day.

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It's up now, well it's pretty much just flat.

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But the S&P 500 started out down and it's just tailing out.

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And that is on a lot of rumors of bad earnings reports for the big tech companies, that kind

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of thing.

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It was happening last night.

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One former student who's a trader in Chicago was telling me what he was hearing as rumors.

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And there weren't very many good rumors in the mix last night.

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And that, of course, built up in the aftermarket and the pre-market, an imbalance between

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buy and sell was sell on the heavy side.

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So as you can see, at the bell, it was down from the pressure of all those pre-market

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orders filling in the first few minutes.

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And then it just kept going down from there as more investors got all kinds of excited

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about the down day.

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And you see the NASDAQ is just taking a toilet break right now already, and we're early in

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the day.

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It's down more than a percent and a half.

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I don't foresee that going too much farther.

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When you get down that low, bargain hunters start to slide in and pick up some of the

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stocks.

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I say all this to you because this gets you to thinking in the mint mode of the investors,

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of traders from my old world.

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And it helps you to frame in a more objective light with the knowledge that we've had from

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past experience being imparted to you through me.

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But it's not a very pleasant day, let's put it that way.

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It's not one of those great days.

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And then if you see over, well, I clipped off a little too soon here.

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Notice I kind of ignore the rustle.

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I'm not sure what that's supposed to tell you about anything.

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But crude is actually, it's taking a drop.

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Notice that trading range, remember I said there was a trading range we've seen over

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and over the past few years, and it likes to stay in that band, 72 to 79.

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Well it's bouncing around.

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It's bouncing downward now, but there you go.

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And of course, if we have the stock market going to hell, the gold bugs are going to

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say, oh boy, it's the apocalypse.

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Let's buy gold and hide in our caves.

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And so there they are, just pushing the price of gold up, buying gold and having a good

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time with it.

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Silver is actually up to some, but not like that.

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That's much more dramatic.

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But anyway, the commodities are up somewhat.

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I'm not too concerned.

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This is just more one of those days when I hesitate to say correction.

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That's such a pop fad word.

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It's one of those days where the markets are consolidating.

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They're just in a grouchy mood today.

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And so the bears come out of the woodwork and have a party.

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Now the 10-year bond, there's buying pressure in the bonds.

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You see the price going up, or you say, wait a minute, fat boy, I see red.

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Yeah, that's the yield going down.

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Price goes up, yield goes down.

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So in other words, we have something.

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I've told you this term before, and now I'm going to say it again.

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You'll get used to it.

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Flight to quality.

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We have something with flight to quality, from riskier assets to less risky assets,

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from stocks to bonds, from bonds to gold, from gold to bullets.

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Well we see the stocks, the investors are getting out of stocks, and they are climbing

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up here into bonds, buying bonds, stage one flight to quality.

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And you've got the gold bugs having fun.

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So you have a second stage of flight to quality, from stocks, risky, to bonds, less risky,

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and from bonds to gold, which is even less risky, at least it's supposed to be.

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Fortunately, we don't have any indexes on bullets right here in front of us.

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So there you go.

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So it is kind of a classic flight to quality day.

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Now if this goes on day after day, I get a little worried.

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But right now, all investors are doing as they're saying, okay, stocks suck, and we

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can make some money selling out of the stocks and buying into the bonds because bond prices

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are rising.

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Let's grab it right now.

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And the gold bugs are in their own world, having an exciting day today too.

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But moving over here.

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Now, just as a quick note, the euro, there's really nothing happening in the currency exchange

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market, euro versus USD.

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And about the same with the Great Britain Pound against USD.

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There's really that pretty tame activity, a little bit of price appreciation, but not

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much.

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And Japan is more so the, well, that one's backwards.

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So the Japanese yen against the US dollar is doing the opposite of what you see there

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because we quote this one backwards.

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See how USD is on the back end of these, like the euro, USD, and the pound against USD.

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But you see USD is against the Japanese yen, so the quotes are backwards.

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The reason is that the yen is a very low price against the dollar.

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If you want a meal in Tokyo, you might spend a couple of thousand yen, and it sounds like

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a lot, but no, that's just a few bucks kind of thing.

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That's how it works.

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But anyway, going over here, speaking of Tokyo, Tokyo started out in a really bad mood last

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night and through the trading day, which was our sleep time over here, it climbed up, the

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bulls crawled back out of the cave that the bears had slapped them into, and it came back

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up and finished up actually not too bad, more than a half a percent for the day after a

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wretched start.

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Now the London, on the FTSE 100, it started down.

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You see how the bulls pulled that one out, but we're still trading.

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I think they're still trading over there, and the bears have taken back over, and the

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profit taking has driven it back down, but it's really almost flat from where it started

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the morning over in London.

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So there we are.

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That's sort of a quick survey of the markets as we are, looking at a few of our favorites.

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Let's see what's happening.

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Well, let me share you something.

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I'm going to go over here to googlenews.google.com and show you something here.

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I'm awfully full.

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I can't, come on, I was looking for news articles.

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This is one of those services that I was warning you against.

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I can't find the article, and they're not showing me the news that I want to see.

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Let me try this again.

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Go back to Yahoo Finance.

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And we're not going to be able to see back to the classic view.

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They recommended in a news article that was repeated on Google News, they said, you've

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got to invest in AI.

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Well what's the great companies that are big and hot in AI?

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First of all, the ones they recommended are not AI.

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They're just big tech companies.

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And second of all, the ones that they recommended were AMD, which doesn't even have a beta anymore,

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and they also recommended Nvidia.

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Now those two companies, you notice, I think I already showed you AMD, it had a beta posted

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last few days ago.

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But see the beta, see the price earnings ratios?

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Those are not stocks that are appropriate investments for anyone with half a brain.

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They're both high risk, highly overvalued stocks.

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You have already heard in this class, and you'll hear me preach this gospel over and

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over again, that you will know enough to know that the motley fool is most definitely the

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motleyest of fools there are.

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Unless you really want to follow a recommendation service that's very popular with the mass

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media.

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The motley fool is huge, but they're also idiots as far as this kind of stuff goes.

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They don't understand appropriateness of investment.

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You wouldn't do this.

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Now as I was telling Mr. Luster before the class began, yeah AI is hot.

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It's hot as hell.

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But the landscape is in terrible turbulence because it's new, it's early.

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And if you're going to consider getting in on the ground floor and grabbing stocks, your

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guess is as good as mine.

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The heavies in the business are Google, which is extraordinarily expensive to buy into,

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and it's got a lot of other things, but it's pouring its resources into AI.

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And other companies, open AI is hot in the game, but there are a lot of small players

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and they are going to slug it out.

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The one thing is for sure is that it costs a lot of money if you are going to be a source

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of artificial intelligence.

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Because you've got to have a lot of computing power in your domain, either in your own place

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or as SAS, which is Software as a Service, or PAS, Platform as a Service, or at the very

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least IAS, which is Infrastructure as a Service.

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Any way you cut it, it's costly to get into this game.

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Some little garage operation is not going to do AI.

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They're going to use someone else's AI engines, AI cloud computing, AI cybersecurity to get

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it done.

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So yeah, it's incredible what's the potential and what's going to come.

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But trying to find your edge in there as an investor, that's another game entirely.

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Especially when I am trained by IBM and their resources are vast, just insanely large.

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How you can compete against that, I don't know.

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We'll see.

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Hard to call.

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Now let me get moving here a little bit.

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Oh, let me pull.

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Now this brings us into financial statements for today.

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Now there are a couple of really key points.

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I rely on the accounting department to teach you accounting.

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This is the lecture where I come in knowing I have to teach you accounting, which means

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that I come in here and I'm thinking, I'm kind of saying to myself, do I want to teach

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this lecture or do I just want to kill myself?

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I work on it and I'm still good with it for now, but I will try to make my distinctions

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here very clear.

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But I'm going to lay out the basics.

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In this regard, what you hear from me is different from how accounting would see those numbers.

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And what we can do for them.

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Remember that, well, maybe you haven't heard this.

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Accounting produces information products.

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That's what they do.

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They produce them for a number of different consumer constituencies.

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I'm using kind of odd terminology.

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This is the way we talk.

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For example, one of their constituencies would be the management of the company.

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They want to see the accounting statement.

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Another constituency would be various levels of federal and state and possibly municipal

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government.

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They would be constituencies, consumers of this information product being produced by

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these workers called accountants.

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Now there are other ones too.

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Accountants would be a constituency.

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00:18:45,880 --> 00:18:52,560
Possibly interest groups, environmental interest groups would be a constituency.

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The Wall Street Boys would be a constituency.

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00:18:56,280 --> 00:18:59,640
The investment community in general would be a constituency.

242
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These are all consumers of that information product that you make.

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So that sets the platform.

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00:19:10,040 --> 00:19:12,040
They are producing a product.

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00:19:12,040 --> 00:19:15,960
The product is actually part of a product line.

246
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The product line being the financial statements.

247
00:19:20,320 --> 00:19:27,520
Now this product line, you will have different constituencies focusing to one greater degree

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or another on certain of those and not so much on others possibly.

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In our business, in finance, we will take that information product that they deliver,

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00:19:43,920 --> 00:19:47,200
the income statement, the balance sheet, the statement of retained earnings, the statement

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00:19:47,200 --> 00:19:50,200
of cash flows, and the notes to the financial statement.

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We'll take those and then we have to fix them to the extent that we can.

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In some cases we're just going to look at it and use their numbers.

254
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But in other cases we will need to add things in, take things out that are not what we consider

255
00:20:13,440 --> 00:20:17,680
to be meaningful, that are not what we need.

256
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So in other words, you come to my house and I say I'm going to have steak.

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So I make a steak.

258
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And I give it to you.

259
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Now I like my steak on the rare side, just above the level.

260
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But you look at it and oh my God, it's bleeding and it's pulsating.

261
00:20:39,560 --> 00:20:43,100
So you put it back on the grill for a ffff.

262
00:20:43,100 --> 00:20:46,320
So you have altered my product.

263
00:20:46,320 --> 00:20:51,040
Now he comes in and he says, now wait a minute, this thing is okay with the blood pouring

264
00:20:51,040 --> 00:20:54,800
out of it and spurting, but it's not salty enough.

265
00:20:54,800 --> 00:20:56,620
So you put some salt on it.

266
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Or you would say, eww, fat, cholesterol, I'm not into that.

267
00:21:00,360 --> 00:21:03,640
And so you'd cut off the fat.

268
00:21:03,640 --> 00:21:10,560
And then you say it's not juicy enough, so you take my infuser and you some beef broth

269
00:21:10,560 --> 00:21:12,020
into it.

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00:21:12,020 --> 00:21:16,240
So you're all altering the original product that I created.

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That's how it is with us.

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00:21:18,360 --> 00:21:23,980
We are going to alter it for our needs, for our purposes.

273
00:21:23,980 --> 00:21:29,520
And that's when it gets, the routines, don't be blindsided.

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00:21:29,520 --> 00:21:34,200
A lot of this, well this is just arithmetic.

275
00:21:34,200 --> 00:21:43,700
And once we've got what we want out of it, then we go about the business of interpreting

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00:21:43,700 --> 00:21:46,440
what we see.

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00:21:46,440 --> 00:21:52,200
That's where we are really different.

278
00:21:52,200 --> 00:21:55,960
The accountant's, here's your damn numbers, enjoy.

279
00:21:55,960 --> 00:22:02,960
Well we have to make some meaning out of our version of those numbers.

280
00:22:02,960 --> 00:22:04,800
What are they telling us?

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00:22:04,800 --> 00:22:06,680
What does this say?

282
00:22:06,680 --> 00:22:10,760
Not about the company's past because these financial statements are what has happened

283
00:22:10,760 --> 00:22:12,800
already.

284
00:22:12,800 --> 00:22:21,640
We need to see into a dark crystal ball made from these numbers and from other resources

285
00:22:21,640 --> 00:22:24,920
into what is going to happen.

286
00:22:24,920 --> 00:22:26,920
Where is this company going?

287
00:22:26,920 --> 00:22:35,440
Because the value of the corporation has nothing to do with those numbers.

288
00:22:35,440 --> 00:22:42,480
It has everything to do with what those numbers will be or what is a better thing to think

289
00:22:42,480 --> 00:22:44,760
about than those numbers.

290
00:22:44,760 --> 00:22:49,400
Now I brought this up before, the classic example being a property plant and equipment.

291
00:22:49,400 --> 00:22:53,720
That's a historical number subject to a depreciation schedule.

292
00:22:53,720 --> 00:22:59,680
It has nothing to do with the value of that property plant and or equipment.

293
00:22:59,680 --> 00:23:07,440
The value of that property plant and equipment is whatever it can be sold for now or whatever

294
00:23:07,440 --> 00:23:11,040
it would cost to replace it now.

295
00:23:11,040 --> 00:23:20,640
That is the number that we care about, replacement cost, not historical cost, market value of

296
00:23:20,640 --> 00:23:25,600
the asset now, not what it was worth at one time.

297
00:23:25,600 --> 00:23:33,840
Many many companies live on their reputation and I can give you so many examples of that.

298
00:23:33,840 --> 00:23:39,840
And they think that measures the value of the company and they don't have to worry anymore

299
00:23:39,840 --> 00:23:46,400
about being important because they are important according to the accountants.

300
00:23:46,400 --> 00:23:47,920
But that's not how it works.

301
00:23:47,920 --> 00:23:56,680
I can name you many great companies that stood tall in the past that are now rubble.

302
00:23:56,680 --> 00:24:01,640
Sears is a good example of that, a fabulous example of that.

303
00:24:01,640 --> 00:24:09,760
A leader, the innovator of catalogs to the common people, mass media, mass marketing

304
00:24:09,760 --> 00:24:11,600
communication.

305
00:24:11,600 --> 00:24:13,960
They screwed the pooch.

306
00:24:13,960 --> 00:24:20,640
They were so far behind the curve on getting to an online selling platform, an e-commerce

307
00:24:20,640 --> 00:24:21,720
solution.

308
00:24:21,720 --> 00:24:25,280
They died because they could not innovate.

309
00:24:25,280 --> 00:24:30,480
So this is why we in finance have to be different.

310
00:24:30,480 --> 00:24:36,760
Whether you're in investing or in corporate finance or in real estate finance or in entertainment

311
00:24:36,760 --> 00:24:43,440
finance or any kind of aspect of finance, it's all about what the future holds.

312
00:24:43,440 --> 00:24:50,600
That having been said, we start with the financial statements themselves.

313
00:24:50,600 --> 00:24:56,680
And let me write some things on the board here, kill this for a minute.

314
00:24:56,680 --> 00:25:03,440
And I don't know what to do, just mute it.

315
00:25:03,440 --> 00:25:06,960
Okay let me grab some marker here.

316
00:25:06,960 --> 00:25:12,240
Now these financial statements.

317
00:25:12,240 --> 00:25:18,800
The pivotal statement, and I don't know if they teach you this in accounting exactly,

318
00:25:18,800 --> 00:25:24,420
but I'm talking to you from the perspective of a finance professional.

319
00:25:24,420 --> 00:25:28,480
The pivotal financial statement, a lot of people think, well that would be the income

320
00:25:28,480 --> 00:25:30,840
statement because that's where the profit is.

321
00:25:30,840 --> 00:25:45,080
No, the pivotal, the core statement is the balance sheet.

322
00:25:45,080 --> 00:25:54,840
Who thought of using glass to write on?

323
00:25:54,840 --> 00:25:58,240
Might have to have the TA come up so I can write on his back.

324
00:25:58,240 --> 00:26:01,240
You can read that better.

325
00:26:01,240 --> 00:26:04,200
Just kidding, easy.

326
00:26:04,200 --> 00:26:14,480
Okay, because the other financial statements actually flow, they are like side calculations.

327
00:26:14,480 --> 00:26:23,320
They are like envelopes on which you do scratch work that then shows up in the balance sheet.

328
00:26:23,320 --> 00:26:32,920
Well the income statement is a giant envelope.

329
00:26:32,920 --> 00:26:42,280
Your revenues minus your costs minus your, what was I saying about, minus your interest

330
00:26:42,280 --> 00:26:49,040
expense minus your taxes gets you to net income.

331
00:26:49,040 --> 00:26:52,920
Well that's the net income.

332
00:26:52,920 --> 00:26:59,200
That's the one, but it's still going to stop some place along the way to get to the balance

333
00:26:59,200 --> 00:27:04,920
sheet because then that goes to the statement of retained earnings.

334
00:27:04,920 --> 00:27:17,160
That last number there along with some other numbers and that goes to the shareholders

335
00:27:17,160 --> 00:27:21,480
equity in the balance sheet.

336
00:27:21,480 --> 00:27:25,640
Calculate this, then calculate that and then take it over and plop it into the balance

337
00:27:25,640 --> 00:27:30,760
sheet in the stockholders equity, liabilities and stockholders equity.

338
00:27:30,760 --> 00:27:33,240
So there's that one.

339
00:27:33,240 --> 00:27:48,480
And then you have this one over here, the statement of cash flows, which show how the

340
00:27:48,480 --> 00:27:50,400
cash actually moves.

341
00:27:50,400 --> 00:27:57,840
That's the one that's closest to our hearts in finance because this is showing cash moving

342
00:27:57,840 --> 00:28:03,200
through the various investing activities, operating activities, investment activities,

343
00:28:03,200 --> 00:28:04,520
financing activities.

344
00:28:04,520 --> 00:28:10,280
That's showing what was drawing cash and what was providing cash.

345
00:28:10,280 --> 00:28:16,960
We actually, back in my time, we called this one the sources and uses statement.

346
00:28:16,960 --> 00:28:23,920
It was kind of more descriptive because it told you where money was coming in, okay,

347
00:28:23,920 --> 00:28:25,960
that would be at the net income line.

348
00:28:25,960 --> 00:28:28,880
However, where was more money?

349
00:28:28,880 --> 00:28:30,960
What else do we have to correct?

350
00:28:30,960 --> 00:28:34,800
And then they have add back to the depreciation expense because there's no such thing.

351
00:28:34,800 --> 00:28:37,320
There is no depreciation.

352
00:28:37,320 --> 00:28:42,200
I always thought about making a corporation called depreciation so that every company

353
00:28:42,200 --> 00:28:49,560
in the world would have to write a check to me, depreciation, but absent that, okay.

354
00:28:49,560 --> 00:28:52,560
So you have to do that fix.

355
00:28:52,560 --> 00:28:57,240
Okay, and then you've got these problems with the assets and the liabilities, especially

356
00:28:57,240 --> 00:28:59,840
the current assets and the current liabilities.

357
00:28:59,840 --> 00:29:00,840
Let me give you an example.

358
00:29:00,840 --> 00:29:07,120
I'm going to ask this and know that someone has not.

359
00:29:07,120 --> 00:29:11,360
Madam, have you seen my artwork?

360
00:29:11,360 --> 00:29:12,360
Of course you haven't.

361
00:29:12,360 --> 00:29:13,360
I have.

362
00:29:13,360 --> 00:29:14,360
You?

363
00:29:14,360 --> 00:29:15,360
Yeah.

364
00:29:15,360 --> 00:29:16,840
So you're the weirdo who's putting those odd comments.

365
00:29:16,840 --> 00:29:17,840
No.

366
00:29:17,840 --> 00:29:18,840
No, okay.

367
00:29:18,840 --> 00:29:20,840
No, I had a really weird one this morning.

368
00:29:20,840 --> 00:29:22,920
Oh, Lincoln pops off.

369
00:29:22,920 --> 00:29:31,040
Yeah, I mean, most of it, if you ever wanted to see what I do, go to either my Amazon storefront

370
00:29:31,040 --> 00:29:34,280
or to Instagram, Professor Wraith.

371
00:29:34,280 --> 00:29:44,160
But okay, I go to an art show and my art is expensive.

372
00:29:44,160 --> 00:29:45,160
People come in.

373
00:29:45,160 --> 00:29:47,600
Most people really like it.

374
00:29:47,600 --> 00:29:52,600
So I do the sales routine and it's the artist sales routine.

375
00:29:52,600 --> 00:30:00,280
I sit there like the sad, brooding artist whom no one understands and then I look up,

376
00:30:00,280 --> 00:30:02,800
you see my art, you like it, don't you?

377
00:30:02,800 --> 00:30:04,800
No one likes my art.

378
00:30:04,800 --> 00:30:08,280
Do you want to buy it?

379
00:30:08,280 --> 00:30:10,600
You know, the whole game.

380
00:30:10,600 --> 00:30:17,840
And then, okay, artwork $1,200, let's show this here.

381
00:30:17,840 --> 00:30:20,280
Okay, I can't afford this.

382
00:30:20,280 --> 00:30:23,080
I love it, but where would you put it?

383
00:30:23,080 --> 00:30:25,160
Tell me where you would put it.

384
00:30:25,160 --> 00:30:26,640
The whole thing.

385
00:30:26,640 --> 00:30:27,640
Okay.

386
00:30:27,640 --> 00:30:29,800
Well, I offer financing.

387
00:30:29,800 --> 00:30:31,680
You do?

388
00:30:31,680 --> 00:30:34,280
Yes, yes.

389
00:30:34,280 --> 00:30:42,680
So I sell for $1,200, $400 cash and then $800 as an account receivable.

390
00:30:42,680 --> 00:30:50,280
So to the IRS, to the world that sees my income statement, they see that I pulled in $1,200,

391
00:30:50,280 --> 00:30:58,320
but that is a lie because what really happened was that revenue was $1,200 and then I had

392
00:30:58,320 --> 00:31:06,840
cash debited $400, but accounts receivable debited $800.

393
00:31:06,840 --> 00:31:12,520
So most of the action did not happen in the income statement.

394
00:31:12,520 --> 00:31:14,000
That has to be fixed.

395
00:31:14,000 --> 00:31:21,640
You see, when current assets go up, your cash flow goes down from period to period.

396
00:31:21,640 --> 00:31:31,440
Current assets go up, free cash flow goes down based from the revenue.

397
00:31:31,440 --> 00:31:41,040
Current assets go up, free cash flow goes down.

398
00:31:41,040 --> 00:31:52,800
But then she'll pay me off, she'll pay the $800, at which time I will then fix the mess

399
00:31:52,800 --> 00:31:55,820
that happened.

400
00:31:55,820 --> 00:32:01,280
The account receivable will go down, so free cash flow will go up.

401
00:32:01,280 --> 00:32:05,600
If you can get this down the first couple of times, write this in your notes because

402
00:32:05,600 --> 00:32:13,280
I do it on quizzes, on the exam, and you'll see even to this day, once in a while, I get

403
00:32:13,280 --> 00:32:18,400
so confused I can't find my own button using roadmaps and Rand McNally.

404
00:32:18,400 --> 00:32:19,400
Okay?

405
00:32:19,400 --> 00:32:20,400
GPS.

406
00:32:20,400 --> 00:32:21,400
Okay.

407
00:32:21,400 --> 00:32:24,000
But, okay, so there you go.

408
00:32:24,000 --> 00:32:35,480
You see, we in finance can't believe the income statement because the income statement

409
00:32:35,480 --> 00:32:38,200
is going to lie.

410
00:32:38,200 --> 00:32:44,040
But it's not just in revenue, it's also on the other side.

411
00:32:44,040 --> 00:32:51,160
I decide, sir, that I'm going to hire you as my assistant, okay, at our shows.

412
00:32:51,160 --> 00:32:56,880
So I say, you do this gig with me and I'll pay you $300.

413
00:32:56,880 --> 00:32:57,880
You $100.

414
00:32:57,880 --> 00:33:00,440
No, $300, okay?

415
00:33:00,440 --> 00:33:01,840
Well good.

416
00:33:01,840 --> 00:33:11,640
So on my expenses, wages have gone, I've paid $300 in wages, which looks like it hurt free

417
00:33:11,640 --> 00:33:12,640
cash flow.

418
00:33:12,640 --> 00:33:14,920
But I am a son of a bitch.

419
00:33:14,920 --> 00:33:17,920
I'll pay him next month.

420
00:33:17,920 --> 00:33:25,720
So what looks like $300 out of my pocket was actually $300 increase in wages payable.

421
00:33:25,720 --> 00:33:31,740
So I actually freed up cash relative to what the income statement says.

422
00:33:31,740 --> 00:33:39,480
So when a current liability goes up, free cash flow relative to what's on the income

423
00:33:39,480 --> 00:33:41,680
statement increases.

424
00:33:41,680 --> 00:33:47,320
You follow me?

425
00:33:47,320 --> 00:33:53,620
But then eventually I pay him, you know, he comes around with his ginormous friends and

426
00:33:53,620 --> 00:33:55,480
baseball bats.

427
00:33:55,480 --> 00:33:59,120
And so, okay, here's your $300.

428
00:33:59,120 --> 00:34:10,440
So then wages payable, a current liability, goes down and that means that free cash flow

429
00:34:10,440 --> 00:34:13,560
suffers.

430
00:34:13,560 --> 00:34:17,880
You follow?

431
00:34:17,880 --> 00:34:19,880
Put this diagram somewhere.

432
00:34:19,880 --> 00:34:26,400
I mean, you know, if you're into tattoos, you can't beat this as a tat on your thigh.

433
00:34:26,400 --> 00:34:30,520
I've done that myself.

434
00:34:30,520 --> 00:34:34,960
You follow it?

435
00:34:34,960 --> 00:34:44,600
But right there, the income statement appears to us in a form that is great with accounting,

436
00:34:44,600 --> 00:34:52,280
generally accepted accounting principles, consistently applied, all that, but it's not

437
00:34:52,280 --> 00:34:57,960
telling us what really happened.

438
00:34:57,960 --> 00:35:04,840
So we have to, the statement of cash flows helps us see what really happened relative

439
00:35:04,840 --> 00:35:08,520
to the revenue.

440
00:35:08,520 --> 00:35:16,680
The next thing that's going to happen here, you might see me once in a while, I do a gig

441
00:35:16,680 --> 00:35:17,680
every now and then.

442
00:35:17,680 --> 00:35:21,840
I used to do a lot of professional photography.

443
00:35:21,840 --> 00:35:27,760
I've moved more to art now, but back in the day, I did a lot of professional photography.

444
00:35:27,760 --> 00:35:33,040
Product photography, portrait, model, that kind of stuff.

445
00:35:33,040 --> 00:35:34,280
Then I moved over.

446
00:35:34,280 --> 00:35:40,160
I did so much photography of people that I began to really hate human beings, so I moved

447
00:35:40,160 --> 00:35:42,200
over to landscape photography.

448
00:35:42,200 --> 00:35:46,800
But you might see me bring in someday some of my photography equipment.

449
00:35:46,800 --> 00:35:49,520
I carry it around because it's so costly.

450
00:35:49,520 --> 00:35:51,600
I don't want to leave it someplace.

451
00:35:51,600 --> 00:35:56,040
I bought a lens, $4,500 portrait lens.

452
00:35:56,040 --> 00:35:58,680
Very, very expensive.

453
00:35:58,680 --> 00:36:04,600
Now $4,500 went out of my pocket.

454
00:36:04,600 --> 00:36:06,720
It's gone.

455
00:36:06,720 --> 00:36:14,440
That $4,500, I am not allowed to put that as an operating expense.

456
00:36:14,440 --> 00:36:21,640
I must, to use the term, capitalize it, and then depreciate it over the number of years

457
00:36:21,640 --> 00:36:23,520
I'm allowed to.

458
00:36:23,520 --> 00:36:29,280
Now if I were doing straight line over five years, that means that on the income statement,

459
00:36:29,280 --> 00:36:35,200
you would see depreciation expense $900 five years in a row.

460
00:36:35,200 --> 00:36:39,160
There was no $900 anywhere.

461
00:36:39,160 --> 00:36:45,560
All that happened was in the first year, I spent $4,500.

462
00:36:45,560 --> 00:36:54,640
So I must take out the depreciation, I must add back depreciation expense because it doesn't

463
00:36:54,640 --> 00:36:56,600
exist.

464
00:36:56,600 --> 00:37:03,360
But then I have to subtract what really happened, $4,500 in the first year.

465
00:37:03,360 --> 00:37:08,360
The statement of cash flows helps us do that too.

466
00:37:08,360 --> 00:37:16,280
And the question comes up, oh wait a minute fat boy, why do we just add it in to begin

467
00:37:16,280 --> 00:37:17,280
with?

468
00:37:17,280 --> 00:37:23,040
Why don't we just not look at the depreciation expense in the income statement?

469
00:37:23,040 --> 00:37:29,560
There's a reason, because the depreciation expense actually does create a real cash flow

470
00:37:29,560 --> 00:37:33,880
from its impact on the taxes we pay.

471
00:37:33,880 --> 00:37:40,080
Because every year I take that $900 off, that's $900 that I don't have to pay taxes on.

472
00:37:40,080 --> 00:37:47,740
So it creates, it's a myth, but it creates an actual free cash flow for us.

473
00:37:47,740 --> 00:37:54,200
So I leave it in when I'm first starting to do the financial analysis.

474
00:37:54,200 --> 00:37:59,040
But then I take it out at the end.

475
00:37:59,040 --> 00:38:07,920
Because the amount itself, okay if you take, say I'm in a 20% tax bracket, that 9% means

476
00:38:07,920 --> 00:38:18,240
that I save, that $900 rather, means that I save $900 times.20, which would be $180.

477
00:38:18,240 --> 00:38:25,800
So I really do want to have it in there in the expenses so that I can recognize the tax

478
00:38:25,800 --> 00:38:27,980
shield from it.

479
00:38:27,980 --> 00:38:34,040
But then once that's done, I have to add it back in, because it never really happened,

480
00:38:34,040 --> 00:38:36,680
the $900.

481
00:38:36,680 --> 00:38:41,040
So take all that, and we're going to go through something here in a minute and I'll flesh

482
00:38:41,040 --> 00:38:42,420
things out.

483
00:38:42,420 --> 00:38:49,400
But the statement of cash flows, it looks at all the different activity types in a company.

484
00:38:49,400 --> 00:38:58,360
Investing types of activity, then the financing types of activity, and then it also looks

485
00:38:58,360 --> 00:39:04,720
at the investing types of activities.

486
00:39:04,720 --> 00:39:08,840
And that's where capital expenditures, you invest in stuff, would come in.

487
00:39:08,840 --> 00:39:11,760
And so it works those back and forth.

488
00:39:11,760 --> 00:39:18,140
And at the top, how much cash you're started with, at the bottom was cash flows coming

489
00:39:18,140 --> 00:39:24,960
in through revenues minus the changes in accounts receivable and all that.

490
00:39:24,960 --> 00:39:30,040
Then how much came in to our organization through our investments in other companies,

491
00:39:30,040 --> 00:39:35,280
how much went out through our actual expenditures on heavy capital equipment, all that kind

492
00:39:35,280 --> 00:39:36,280
of stuff.

493
00:39:36,280 --> 00:39:42,840
At the bottom is the cash that we should have at the end of the year.

494
00:39:42,840 --> 00:39:46,200
There was the cash that was in the bank at the beginning, then there was up and down

495
00:39:46,200 --> 00:39:51,040
all these things we have to add and subtract, and then at the end, that would mean that

496
00:39:51,040 --> 00:39:53,840
much cash is at the end.

497
00:39:53,840 --> 00:40:00,760
So the statement of cash flows ends with the cash balance at the end of the period.

498
00:40:00,760 --> 00:40:08,920
Well that is the very first line of the balance sheet on the asset side.

499
00:40:08,920 --> 00:40:16,760
Every one of those statements is something to do with the balance sheet.

500
00:40:16,760 --> 00:40:25,080
Now I mentioned one other financial statement that is not emphasized hardly at all in your

501
00:40:25,080 --> 00:40:27,220
early accounting courses.

502
00:40:27,220 --> 00:40:34,960
And I learned all about this one through my work many years ago as a consultant.

503
00:40:34,960 --> 00:40:45,880
Here are the notes to the financial statement.

504
00:40:45,880 --> 00:40:55,920
They can go on and on and on, but hidden in there is a ton of information, much of it

505
00:40:55,920 --> 00:41:07,200
numerical that helps us as financial analysts better understand the company.

506
00:41:07,200 --> 00:41:12,620
For example, in the notes somewhere is going to be something about executive compensation

507
00:41:12,620 --> 00:41:18,840
and stock options and all that kind of stuff, and stock or warrants that have been given

508
00:41:18,840 --> 00:41:19,840
to executives.

509
00:41:19,840 --> 00:41:26,640
And there will also be notes about leases and all that kind of stuff, our liability

510
00:41:26,640 --> 00:41:29,560
exposures and all this kind of stuff.

511
00:41:29,560 --> 00:41:34,920
And even beyond that, I'll tell you a quick story.

512
00:41:34,920 --> 00:41:41,700
One of the things I did as a consultant, as I mentioned earlier, I would help small companies

513
00:41:41,700 --> 00:41:48,880
go public with what were called million dollar offerings or something like that.

514
00:41:48,880 --> 00:41:55,560
And another part of that was we had a trick back in the day.

515
00:41:55,560 --> 00:41:59,400
It's still around, but only the big dogs can do it because they try to throw a little dog

516
00:41:59,400 --> 00:42:00,680
like me in jail for it.

517
00:42:00,680 --> 00:42:04,480
It was called a reverse merger.

518
00:42:04,480 --> 00:42:11,760
What we would do is we would find a dead, a dead as a doornail public company, something

519
00:42:11,760 --> 00:42:16,960
that no one even knew where the officers of the company or the directors were.

520
00:42:16,960 --> 00:42:21,120
It was sitting there just in limbo.

521
00:42:21,120 --> 00:42:22,120
It existed.

522
00:42:22,120 --> 00:42:28,580
And at one time, it filed paperwork with the SEC because you have to do that quarterly

523
00:42:28,580 --> 00:42:31,040
and annually and all that.

524
00:42:31,040 --> 00:42:32,620
But that had all gone away.

525
00:42:32,620 --> 00:42:34,400
It was just sitting there.

526
00:42:34,400 --> 00:42:38,400
And you would have, back in that time, you didn't have computers to do it.

527
00:42:38,400 --> 00:42:43,800
You had to just prowl through these big, thick books of public companies that were done by

528
00:42:43,800 --> 00:42:47,520
places like Value Line and all that.

529
00:42:47,520 --> 00:42:49,520
And we would find possibilities.

530
00:42:49,520 --> 00:42:50,520
And then we'd start researching.

531
00:42:50,520 --> 00:42:52,420
And okay, we've got it.

532
00:42:52,420 --> 00:42:56,240
We have a dead public shell, as we call it.

533
00:42:56,240 --> 00:43:01,000
Now you, sir, have a private company.

534
00:43:01,000 --> 00:43:03,240
You contact me.

535
00:43:03,240 --> 00:43:05,680
Well, we want to go public.

536
00:43:05,680 --> 00:43:08,360
Well, that's going to be complicated.

537
00:43:08,360 --> 00:43:11,720
It's an insane amount of paperwork.

538
00:43:11,720 --> 00:43:14,520
And they're going to look up your butts with a microscope.

539
00:43:14,520 --> 00:43:21,600
And you're not exactly what we would call the upstanding fine stud.

540
00:43:21,600 --> 00:43:25,080
So here's what I'm going to do.

541
00:43:25,080 --> 00:43:27,660
I have a way to do this for you.

542
00:43:27,660 --> 00:43:32,740
We are going to reverse merge your private company into the public shell.

543
00:43:32,740 --> 00:43:35,600
But first, I have to take control of the public shell.

544
00:43:35,600 --> 00:43:38,840
So I send all the shareholders of that company.

545
00:43:38,840 --> 00:43:46,440
I get a shareholders list, and I say, I am going to bring this company back to life.

546
00:43:46,440 --> 00:43:53,280
Here is a document where you as a shareholders vote me a million shares and give me control

547
00:43:53,280 --> 00:43:57,560
as the board of directors.

548
00:43:57,560 --> 00:44:01,920
And I get enough of them sending back the proxy card.

549
00:44:01,920 --> 00:44:02,920
And I've got it.

550
00:44:02,920 --> 00:44:12,920
And then I can use my power to reverse merge your private company into my dead skeleton.

551
00:44:12,920 --> 00:44:14,600
And then it comes to life.

552
00:44:14,600 --> 00:44:17,040
And the first thing I'll do is I'll go to the SEC.

553
00:44:17,040 --> 00:44:21,160
And I'll say, I've got to catch up all these back documents.

554
00:44:21,160 --> 00:44:22,160
And I work with them.

555
00:44:22,160 --> 00:44:24,240
OK, it's alive again.

556
00:44:24,240 --> 00:44:27,480
And then the next thing I have to do is get a trading symbol, because the trading symbol

557
00:44:27,480 --> 00:44:28,860
has disappeared.

558
00:44:28,860 --> 00:44:34,640
And that's where I have to do what's called a 15C211 with the NASD, the National Association

559
00:44:34,640 --> 00:44:35,640
of Securities Dealers.

560
00:44:35,640 --> 00:44:37,520
And I can't believe I'm saying this.

561
00:44:37,520 --> 00:44:41,720
Fortunately, the statute of limitations is passed, so there's that.

562
00:44:41,720 --> 00:44:43,280
Bite me.

563
00:44:43,280 --> 00:44:50,920
But here's the thing is that the 15C211 is a hellacious document.

564
00:44:50,920 --> 00:44:56,260
And they have compliance officers who are going to go through my petition for a trading

565
00:44:56,260 --> 00:45:00,920
symbol with a fine-tooth comb.

566
00:45:00,920 --> 00:45:09,480
I ended up being assigned for these deals of mine to this compliance officer named Claire.

567
00:45:09,480 --> 00:45:12,620
She was old, mean, foul-mouthed.

568
00:45:12,620 --> 00:45:14,360
She was a hateful woman.

569
00:45:14,360 --> 00:45:16,780
I really liked her.

570
00:45:16,780 --> 00:45:20,040
And she gave me everything.

571
00:45:20,040 --> 00:45:22,920
And she gave it to me in no uncertain terms.

572
00:45:22,920 --> 00:45:28,640
The last thing she did the first time I filed, she said, well, you've done everything I want,

573
00:45:28,640 --> 00:45:32,760
except you've got one note that you need to put in there.

574
00:45:32,760 --> 00:45:37,680
And she said, I'll call you back on a personal line here later.

575
00:45:37,680 --> 00:45:40,520
And so she said, OK, here's what you do.

576
00:45:40,520 --> 00:45:43,520
Last note.

577
00:45:43,520 --> 00:45:49,440
These financial statements have been prepared with generally accepted accounting principles

578
00:45:49,440 --> 00:45:51,840
consistently applied.

579
00:45:51,840 --> 00:45:58,440
This may not be the case with this company because accruals may not be valid.

580
00:45:58,440 --> 00:46:03,120
Remember, accruals, you're assuming the company is a going concern.

581
00:46:03,120 --> 00:46:09,960
This company may not be a going concern, and investors are advised to take that into consideration

582
00:46:09,960 --> 00:46:12,840
with any investment herein.

583
00:46:12,840 --> 00:46:16,800
It was a note there at the bottom saying, you're looking at financial statements that

584
00:46:16,800 --> 00:46:18,600
are a myth.

585
00:46:18,600 --> 00:46:23,160
And I covered my ass for my client doing that.

586
00:46:23,160 --> 00:46:24,160
OK?

587
00:46:24,160 --> 00:46:25,160
Notes.

588
00:46:25,160 --> 00:46:27,240
Read them for God's sake.

589
00:46:27,240 --> 00:46:30,600
They've got a lot of information in them.

590
00:46:30,600 --> 00:46:31,600
Mother's work is now.

591
00:46:31,600 --> 00:46:33,400
I got a little bit of time left.

592
00:46:33,400 --> 00:46:34,400
Notes.

593
00:46:34,400 --> 00:46:35,400
Pay attention to them.

594
00:46:35,400 --> 00:46:39,520
Now, the next thing I'm going to show you, I'm going to bring this guy back to life.

595
00:46:39,520 --> 00:46:44,400
And I'm going to show you what we call a primary resource.

596
00:46:44,400 --> 00:46:53,340
You will use this for the rest of your miserable lives in finance, especially here at ISU.

597
00:46:53,340 --> 00:47:01,440
When you do term papers and research analysis for classes, you do not go to places like

598
00:47:01,440 --> 00:47:07,040
Wikistupidia or Investistupidia or to Yee-Haw Finance.

599
00:47:07,040 --> 00:47:10,460
You don't go there for the information.

600
00:47:10,460 --> 00:47:13,000
You go to the SEC.

601
00:47:13,000 --> 00:47:21,520
Every public company must file documents with the SEC all the time.

602
00:47:21,520 --> 00:47:25,240
Now, back in my time, we could lie.

603
00:47:25,240 --> 00:47:30,380
But then a couple of really huge scandals wiped out a lot of people's money, and they

604
00:47:30,380 --> 00:47:35,600
cracked down under something called Sarbanes-Oxley.

605
00:47:35,600 --> 00:47:44,720
Now the financial statements must be certified with signatures by the officers and directors

606
00:47:44,720 --> 00:47:46,560
of the company.

607
00:47:46,560 --> 00:47:53,640
So if there is a material misstatement of fact, and you have signed it, and you have,

608
00:47:53,640 --> 00:47:59,280
and you have, the SEC will fine the company.

609
00:47:59,280 --> 00:48:04,680
But then because you personally signed them, it will fine you too.

610
00:48:04,680 --> 00:48:12,320
And if the misstatements are egregious enough, they will refer to the Department of Justice.

611
00:48:12,320 --> 00:48:18,420
The Department of Justice, unlike the SEC, can put you in prison.

612
00:48:18,420 --> 00:48:23,920
That means that you could be some hard-timer's old lady if you lie.

613
00:48:23,920 --> 00:48:28,080
That's why the only people who lie on financial statements right now are people like Elon

614
00:48:28,080 --> 00:48:33,240
Musk, because literally they caught him red-handed.

615
00:48:33,240 --> 00:48:34,240
What does he do?

616
00:48:34,240 --> 00:48:36,760
He goes on Twitter and cuss them out.

617
00:48:36,760 --> 00:48:43,480
Well that was, I do that, you know, I'm going to be the wife of a guy named Bubba.

618
00:48:43,480 --> 00:48:48,720
He just cussed them out on Twitter a couple of years ago.

619
00:48:48,720 --> 00:48:53,420
Anyway, but you can rely on these.

620
00:48:53,420 --> 00:49:03,120
These are the statements that have been uploaded to the SEC and certified as true and without

621
00:49:03,120 --> 00:49:07,760
material misstatements by the company.

622
00:49:07,760 --> 00:49:12,200
No other source is primary with financial data.

623
00:49:12,200 --> 00:49:14,200
No other source.

624
00:49:14,200 --> 00:49:17,920
Well I read this report on, no.

625
00:49:17,920 --> 00:49:20,720
Well I went and they have income statements and balance sheets.

626
00:49:20,720 --> 00:49:23,160
I can see right here, look, look, right here.

627
00:49:23,160 --> 00:49:25,440
See I can find the financials right here.

628
00:49:25,440 --> 00:49:27,440
I could just go to Yahoo Finance and there they are.

629
00:49:27,440 --> 00:49:30,080
There are your damn statements right there.

630
00:49:30,080 --> 00:49:31,080
No.

631
00:49:31,080 --> 00:49:38,640
The truth of the matter is that almost every place is drawing feed, data feed from those

632
00:49:38,640 --> 00:49:41,360
SEC filings.

633
00:49:41,360 --> 00:49:46,480
What's worse though, what's bad is it's, I catch it all the time.

634
00:49:46,480 --> 00:49:50,360
Sometimes I'm not thinking.

635
00:49:50,360 --> 00:49:55,880
Sometimes the data glitches and a number, a really important number isn't there or it's

636
00:49:55,880 --> 00:49:56,880
wrong.

637
00:49:56,880 --> 00:49:57,880
They didn't do it on purpose.

638
00:49:57,880 --> 00:50:04,200
It's just that the data integrity isn't there like it is at the SEC.

639
00:50:04,200 --> 00:50:06,620
So how do we do this?

640
00:50:06,620 --> 00:50:12,840
Go back to a story from long ago.

641
00:50:12,840 --> 00:50:18,320
We use the Edgar filing system and I'll show you that next week on Monday.

642
00:50:18,320 --> 00:50:20,960
I'll show you that.

643
00:50:20,960 --> 00:50:26,480
Every company even has to provide all their financials in Excel format.

644
00:50:26,480 --> 00:50:32,560
So you can just draw down the Excel sheets, carve them up, make pretty charts and look

645
00:50:32,560 --> 00:50:34,400
like a hero.

646
00:50:34,400 --> 00:50:36,400
You don't even have to key in the data.

647
00:50:36,400 --> 00:50:38,480
It's right there in Excel.

648
00:50:38,480 --> 00:50:43,280
SEC requires that all companies and let me tell you, there is so much data.

649
00:50:43,280 --> 00:50:47,640
I'm going to have to show you how to move the tabs around so you get to what you need

650
00:50:47,640 --> 00:50:53,160
because there can be 50 tabs of financial information.

651
00:50:53,160 --> 00:50:57,200
And all I want are these couple, the income statement balance sheet and statement of cash

652
00:50:57,200 --> 00:50:58,680
flows for heaven's sake.

653
00:50:58,680 --> 00:51:00,840
So you have to go around and dig it up.

654
00:51:00,840 --> 00:51:03,080
I'm going to show you how to do that.

655
00:51:03,080 --> 00:51:07,460
But for now, what I want you to do is for the remainder of this period, you do have

656
00:51:07,460 --> 00:51:08,460
a quiz.

657
00:51:08,460 --> 00:51:13,160
It opens up at 1030 but you would have until 1050 to do it.

658
00:51:13,160 --> 00:51:14,880
It's a 10 minute quiz.

659
00:51:14,880 --> 00:51:20,480
But first I want you to get together, figure out who you want to work with for the rest

660
00:51:20,480 --> 00:51:25,480
of this semester that you won't commit acts of violence against.

661
00:51:25,480 --> 00:51:28,400
But for me, that's all I have for you right now.

662
00:51:28,400 --> 00:51:51,600
I thank you.