Alan Kring Productions in association with the Emergent Lights Studio presents
the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 240 for spring semester 2024.
Today, accounting financial statements.
I will go forward until 2.55 at which time you will begin your quiz that is scheduled for today.
So without further ado, we first look at the numbers.
Now the Federal Reserve met today to decide whether to increase, hold steady, or decrease the discount rate,
a driver of all interest rates, and it chose to keep the interest rate where it is.
There was an expectation that it would shave a quarter of a percent off the discount rate, but it didn't do that.
The result was, notice how the expectation had to be changed with the new information.
Well, let's do it this way. First of all, is this a bull or a bear day?
Say it strong, you're right. Bear! You have to say bear day.
Be confident about it. This is a bear day. Not a cave bear. It's just a down day.
The markets were hurt, their feelings were hurt a little bit by the fact that they didn't get the discount rate cut that they were anticipating that they would get.
And so you have the Dow down 0.2%. Now as usual, as the portfolio gets riskier, you will see the effect magnified.
And in the S&P 500, a riskier portfolio than the Dow, it was down 0.94%. And the NASDAQ, which is a substantially riskier portfolio,
the bear was magnified more, down a full percent, one and a half percent. So there you go.
It was a down day. Just the markets were not happy with the outcome, but they've gotten over it.
And you will notice that if you look closely at the spark chart, the information came in that the Fed was not going to lower the interest rate,
so it just went down a little bit. And then it just kind of stayed right where it was from there, because there was no more information, good or bad.
The markets just sort of stay where they are. The crude oil has eased up some, as I've said on several occasions here.
Over the past couple of years, it has liked a trading band for the light sweet Brent of about $72 to $79 a barrel, and it's staying right in that pocket.
It's not moving around. Well, it's down a little bit today, but it's staying in that trading band right there.
This is despite some concerns, and you can tell that the world's financial markets aren't really worried.
We are having something of an escalation in the tangle of conflicts in the Middle East right now.
We are anticipating that the United States is going to take a rather dramatic retaliatory strike against the proxies of Iran, maybe even against Iran itself.
And that will stir up the oil markets a little bit, but they're really, I mean, if they thought it was going to be bad, you'd see the price of oil already shooting up towards $90 a barrel.
It's not, and these guys know what they are doing, these traders, they are, they have fingers on the pulse of every piece of information about world oil supplies and destruction potentials.
So right now, not much worry on that end. Now, first of all, go over here to gold. It spiked, and then it tailed back off some.
But over here, 10-year bonds, they dropped on the outset. This is yields, this is the prices.
So the prices are doing the opposite of what you see here. In this market, you saw that the yields dropped, and then they just kind of stabilized.
In other words, there was buying that drove the price up and the yield down, and then after that little fit, it stayed where it was.
Notice something about this. This is kind of a special one. I had told you about flight to quality.
The flight to quality is moving financial assets from riskier securities to safer securities, from stocks to bonds, from bonds to gold, from gold to bullets, that whole thing right there.
And you see a one-day example of that right here. Investors were selling their stocks. That makes the price fall.
As they sold their stocks, well, they moved those, that, the money that they got for the proceeds over here, and they bought bonds, which is why the price of bonds went up.
There was a flight to quality. In fact, some of that money looks like it went over to gold even.
So that was, this is stage one, money moves from stocks over to bonds. Stage two, money moves from bonds to gold.
So you had both stages, stage one and stage two, flight to quality. Most likely it's temporary. It's just a hissy fit for the day.
But at the same time, here's a classic example of that phenomenon we call flight to quality. Investors sold stocks that drove the price of stocks down.
So they had the money that, from the proceeds from the sale of the stocks, they ran over here and they bought bonds, which drove the price of bonds up and the yields down.
They also maybe threw a little bit of money at gold, and gold went up in price as a result of that increased demand. Classic flight to quality, but like I said, it's nothing to worry about too much right now.
Now if you go over here, Tokyo started out, you know, on the bell it was down. This is last night this was happening.
At the opening bell, it started out down and then it crawled slowly on little bits and pieces of good news through the day until it finished up.
Not bad, I mean, it finished up about almost two thirds of a percent. So it kind of crawled out of its doldrums, its bearish sentiment through the day.
Nothing dramatic at all. And then when the sun set in Tokyo, it was rising across Europe, got to England and London opened, opened down a little bit, crawled back up, and then something really spooked it there at the end.
You see that drop off? There was a rather hellish selling frenzy there right before the closing bell. It just kind of dropped, so it ended the day down from where it began, almost a half a percent.
But we had our own ways today. We were grouchy on the outset, and so that kind of translated into lower prices, but then it slowed, it quieted down.
One thing that you do want to note though, and we usually use the S&P 500 sort of like a proxy for the market as a whole, if you look here at the volume, the volume is really weak.
We're not quite close for the day, but it'll probably finish at about 2.1 billion shares.
But on the average day over the last year, it's been near 4 billion. So today, the market, a lot of market participants weren't even in there.
That's the big dogs. They are sitting on the sidelines just waiting for the smoke to clear to see a better direction.
So they just keep their money in their pockets, and that's why you see this really light volume on the S&P 500 for the day.
And that's something that you should keep in mind. Well, the S&P was down a lot today, but that was on light volume.
That's the amateurs in the small houses and the portfolio adjusters just jockeying around. The heavies weren't there, and they're the ones who you want to pay attention to.
So what happens on a day like this, you have to kind of take, yeah, but this was the small players doing it today.
As we do this over and over, and I'll do this every day, it begins to really sink in, and you begin to think in this much more professional, objective way about what goes on in the world.
There's no apocalypse today, unfortunately, so we will make it to the point where you have to take the quiz later and all that kind of stuff.
Now, I want to take you on a little bit of a journey here. I'm going to do something really quick here.
I'm going to look at some more stocks, but first, this is a caution about looking at resources on the web and things that happen there.
Where am I? I'm looking. No, I'm probably not going to see it. Let me do it this way.
There are these supposedly reputable websites where good financial advice is given.
One of those has the unfortunate name, The Motley Fool.
This is the article, I think this is the one that was, well, no, I'm not going to find it here.
There was an article earlier today where The Motley Fool was saying, well, you've got to get in on the AI wave.
It's everything now. True enough, artificial intelligence is dominating the news and it's dominating technology and it's already beginning to shape the employment landscape.
Now, unfortunately, though, if you are thinking that I should buy AI stocks, that's a bigger question.
The Motley Fool said, okay, here's what we think you should buy.
If you're going into AI, you should go with the leaders in AI.
Unfortunately, that was the end of where they were talking without completely misleading investors.
Their first recommendation was advanced micro devices.
I think I've shown it to you before, AMD is a chip maker.
Major competitor is Intel. And if we look at advanced micro devices and we say, is this a good stock for a small investor to buy?
The first thing is that they are no longer even reporting a beta.
The last beta they reported was above two.
That's two is extraordinarily risky.
That's an inappropriate investment for anyone except for high rolling speculative investors.
So that right there. The other thing is I want you to look at the price earnings ratio, the P-E ratio.
And if you look at that P-E ratio, can you tell me if that's a normal P-E ratio or if there's something really weird about that P-E ratio?
It's pretty high. It's not pretty high. That's high AF.
That is insane.
Intrinsic value would be price that is near intrinsic value would have P-E ratio at about 30.
If a price is much above its intrinsic, the P-E ratio will be well above 30.
If a price of a stock is well below its intrinsic, you'll see a P-E ratio above below 30.
Now you'll notice that that number right there, 1673, is a little above 30.
This stock is insanely overvalued.
First of all, you can't even look at the beta and assess the risk of the stock.
Now the beta has disappeared.
Second of all, the P-E ratio is telling us that this stock has an incredible potential for downside price movement.
This is a terrible piece of advice.
You're getting to the point just this early in the semester where you can make that assessment for yourself
and see that these websites run by these gurus, they don't know what they're talking about.
The truth of the matter is that artificial intelligence is red hot.
The second thing though is that AMD is not into AI.
It's just a computer chip maker.
The heavies in AI right now are Google, obviously.
AI is everything to Google now.
The place where I get all of my certifications, IBM, places like OpenAI,
and there are smaller companies that are in AI, but very few of them really are.
Because in order to be a developer of AI, you need a lot of technological capital,
computing space in the cloud, massive amounts of expertise in everything from
fast machine learning to cyber security and all of that kind of stuff.
It's not for small time players.
There are a lot of companies saying, well, our software is AI powered.
For them, it's just a marketing scam.
It's something that they say.
It's not real.
So claiming that AMD, because it does computer chips, is a leader in AI is ridiculous.
Let me show you the other stocks that they recommended.
The other stocks that they recommended, what was the one?
Oh, NVIDIA.
NVIDIA.
Now some of you who are into gaming or into computers,
you would recognize NVIDIA as a maker of graphics cards.
That's one of their big things that they do.
So let's look at NVIDIA.
Looking at the beta of NVIDIA, what could you tell me about this company?
Sir?
High.
It is stupid high.
When you see 1.25, that's risky territory.
One is the fulcrum, remember.
One means that it has the risk of the overall world portfolio.
Above that, that risk is magnified.
Below one, it's demagnified.
So in this case, you have a magnification of 164% on the world portfolio's volatility.
That's risky, very risky.
At 1.25, I begin to get a little worried.
At 1.5, my back leg begins to itch.
And at 1.64, you're busy worrying about how you're going to eat tonight
because any twitch in the market could be very bad for you.
Now, if we're looking at the P-E ratio of it,
is this stock undervalued, overvalued, or correctly valued?
Ma'am?
Look at the P-E ratio.
Overvalued?
Exactly, it's overvalued.
In fact, roughly, maybe the price has about – it might be –
if 30 is our fulcrum, this thing is maybe two times its intrinsic value right now.
This has a lot of downside potential.
And that's magnified by that bad – that risky beta, that high beta.
So this is, again, they're violating that rule I mentioned before,
appropriateness of investment.
They're giving advice to the average person who thinks he or she is smart
by looking at the experts.
And then they're giving this kind of advice.
That's not good.
It's like going to a doctor for advice on how to be a little bit more active,
and he suggests that you try meth.
It might work, yeah, but you're also going to find yourself wandering around on the
highway saying, my apartment has Stately Bay windows and things like that.
Okay, so just as a cautionary tale, just be careful when you're taking advice from
experts.
I'm going to do what I can to make you good enough to do your own advice in this
and to be careful and measure the advice of these blogs and Internet resources.
They are almost always going to be in one way or another in it for themselves to
make ad revenue, to get subscribers, to make themselves look like they're giving
you the real story.
You can figure out the real story for yourselves.
Anyway, enough of that for the day.
Now, let me do one right here.
This one I'm going to use, I'll probably do this part of the lecture, tie up the
lecture on Monday, but just as a normal stock, let's look at United States Steel
Corporation.
Now, this one was down for the day and you notice that it is actually down, that
beta is seriously high.
Oddly though, can you see that this is also an undervalued stock?
So, I mean, if you want to take risk, yeah, I'm a risk taker, I'm wild and crazy.
I put extra chocolate in my chocolate milk.
I mean, if you're going to do that, here's one that does have magnified risk, two
times the volatility of the market portfolio, but it also has a third of the
normal price earnings ratio.
So, this has, it is definitely undervalued and so it has upside potential, but
that upside potential is going to be, you're going to take that at a high risk on
that.
So, this is kind of one of those where, yeah, you want to take a hard bet, but
you want to have the dice loaded in your favor.
This would be something that might fit that bill.
And also notice that it is profitable, pays a little dividend even, so I mean,
it's one of those stocks that's just kind of a difficult one to decide on.
The one thing you have to appreciate is that U.S. steel is in an industry that is
pretty darn competitive.
We are, I hate to use cliches, but this is a global economy and there are other
companies, other nations, companies in other nations that make steel too.
And some of them make steel by technologies that we still haven't completely
embraced or fully put into the line for the production.
So, like Japan, they make steel, they may use basic oxygen furnaces, which we have
finally kind of embraced, but at the same time, they can make a lot of steel
against us.
So, it's in a competitive industry.
And so, you keep those in mind.
This is called fundamental analysis.
Look at the numbers, but then think beyond the numbers.
Ask yourself about competitiveness of the markets, the quality of the managerial
team, and all of that goes into a decent analysis.
You can do it.
I'm going to show you how.
Speaking of which, it is time now to go on to the painful part of today's lecture.
This is accounting.
Now, I am assuming that you've all had accounting 131.
I come to this lecture, I know this is a lecture where I teach accounting.
And so, as I walk down the hall, I, every time, I have to decide whether I'm going
to go in here and teach about accounting or if I'm going to kill myself first.
Unfortunately for you, again, I've decided I'm going to go through this.
But understand something important is that finance, we don't do accounting.
In fact, we have to fix accounting numbers so that they mean something to us.
Accounting is a production.
It produces a line of products, a product line.
We call those financial statements.
And those financial statements are produced for a variety of consumers,
what we call constituencies.
The information products are generated for a number of different groups.
One group is the upper level management of the company.
The accountants produce those financial statements for them.
In fact, they produce a kind of specialized version of those financial statements
for the management.
And that's the subject of accounting 132, managerial accounting.
However, they also produce them for, the accountants produce these financial
statements for other consumer groups, other constituencies.
One important group is the investors.
But there are two types of investors.
One are the existing investors.
They already hold the stock.
And then there's another type of investor, the potential investor,
the ones who are considering buying the stock.
So those information products are used by them as well.
Another separate constituency is government agencies at the federal
and state and even maybe the municipal level.
They use those financial statements completely separate.
And then there are other constituencies as well.
Among them are outside stakeholder groups.
For example, the unions will, and the employees,
they will use those financial statements sometimes against the company.
Look, you don't give us a raise, but look at this massive compensation package
you just gave to your big dogs in the company.
There's other groups.
Special interest groups will use those information products as well.
Environmental groups, ethics groups, all kinds of outside special interests
will use them.
The political side of government will use those too.
Both the liberals and the conservatives will use those financial statements
to support certain legislation or certain positions on the corporate world
and what laws and regulations are needed or need to be removed.
They're in looking at those financial statements too, for heaven's sakes.
And other countries will look at the financial statements of other companies,
I should say.
Other companies will look at those financial statements as what we call comps, comparables.
Well, how are they doing?
Well, how are their costs doing?
How are their ratios, their asset turnover ratio, all those kinds of things?
They'll be looking at those too.
So it's unbelievable all these information aggregators look at them.
Like there's one I'll show you.
It's supposed to have been emphasized in your Business 100 course,
but I've found that it's not really emphasized enough.
There's an information wellspring called Standard & Poor's Net Advantage.
It collects all that financial accounting information,
and it grinds it into all kinds of its own information products.
And those are available to you as members of the ISU community.
What would otherwise cost thousands of dollars for a subscription
to Standard & Poor's Global Net Advantage, we get for free.
And so I'm just emphasizing, these products that are made by these companies,
public companies, are used by insanely large numbers of consumers of information
in different categories of consumers.
So there you are.
Now, finance has kind of a special take.
As I said, we need to take those numbers and oftentimes just twist them,
add things in, take things out, and then put in other numbers that aren't there,
aren't immediately obvious.
We have to do a lot to them because the difference between accounting and finance
is that the accounting numbers are historical.
They are what has already happened.
We in finance don't care about what has already happened.
All we care about is what is going to happen next.
We have to lean into the future.
Now, the past can give us information, but it is like a dark crystal ball.
It's not the best, and we have to think.
And not only that, once we have ground through some numbers of our own,
like financial ratios and that kind of stuff,
we then have to take the next step and ask, what does this mean?
And that is where fundamental analysis comes in.
It's not enough for you to say, well, I got your numbers.
In our business, we have to determine what actionable consequences those numbers have.
What does that mean the stock price will be?
What does that mean the prospects for the company's revenues will be?
What does that mean about the company's cost structure
and what it has to do to fix the problems in it?
We have to look at the future.
That's where you're going to be, too.
The past means nothing.
There are many companies that sat for years on their past,
and the ultimate result of that was that they never saw that train coming at them called the future.
Examples would be Sears, a great example.
The Powerhouse, the first company that understood the concept of mass marketing
was those Sears catalogs in the 19th century.
My God, everyone got a catalog in the mail.
That was ingenious, but this is the same Sears that didn't even set up an online e-commerce solution
for consumers in the 21st century.
That's the things that we have to watch out for.
We have to say, where are they going, not where they come from.
And that's where someone like you, sir, you might have been an arsonist, a murderer.
I don't care. I want to know what you're going to be next.
It's something bad. I don't know.
But you see, I have to build, and that's one of the things about this college.
The good teacher is going to say, it doesn't matter where you are,
how do I find out where you're going to be and how can I help you get there?
So that's what we do in finance.
We have to look well past what the accountants do.
And don't get me wrong, the accountants are awesome.
The Lord knows I wasn't. I taught accounting and I gave up after a couple of semesters.
But no, I've taught accounting as well. This is different.
Now, let me emphasize a couple of things here.
I'm going to give you real life examples of the processes that go on.
But it boils down to just getting some things in your notes
that will get you through a quiz or an exam.
I'm not going to test you on, okay, well, do you know where the debits and credits go?
That's not how it works for me.
I'll mention them, but it's not the core concept.
But in finance, we don't care about profit, earnings, net income.
I'll wave them around and I'll say, well, let's look at their earnings per CR and all that.
But the reality is that we've got to get way past that in what we're doing.
And it's formulaic to a certain, to a large extent, it's just formulas.
And you can write, and I'll show you how we write Excel routines.
We'll start doing a lot of Excel starting next Monday.
But you'll get the hang of it. It's just arithmetic for the most part.
There's no calculus or anything.
But net profit doesn't mean anything to us.
I'll give you a good example. I've run several companies.
I've owned several companies, my consulting company being one of them for a long time.
And I had a profit. I had positive net income.
No question about that. For several years I did.
But there would be that dark night every two weeks on Thursday night when I had to cut payroll.
And there were a number of times when I had to take money out of my own personal account
and put it into the company account so that I could meet payroll.
You understand? That's cash. That's real cash.
What was happening on the income statement was just following rules.
And that's the way it works all the time, is that what we care about is free cash flow.
What really happens, the amount of cash that is being generated after all the bills,
the revenues that come in and the bills have been paid.
That is not net income. That's just how it worked in my company.
Yeah, by the accounting rules I was doing great.
But by what I had to cut for payroll, I was in trouble all the time.
Catastrophe. I can give you all kinds of other examples.
But let me get a little more specific with numbers on this.
Now, as some of you know, I actually run a company.
It's the longest standing company I've ever done.
Founded in February 12th of 2012, the corporation was.
Emergent Light Studio Incorporated.
If you go to Amazon, you'll see I've got a storefront there.
I've also got several other e-commerce platforms for solutions to selling, including PayPal.
And I think I still have Square, I don't know.
But here's the thing. Go to a show.
Now, I sell online, but I also do the art shows and the exhibits.
And I set up my display area with all the other gypsy tramps and thieves and their display areas around me.
In mine, you'll have artwork on these wire frames, about 1200 pounds worth of it.
And the frames and the art hanging there.
You'll have a customer come in.
You'll have a lot of people just come in, oh, this is pretty, and they'll walk back out.
But sometimes you'll have someone come in and that person will just, somewhere along the line,
he or she will stop and just start looking at something I've created.
And of course, that's when I go into my act.
The brooding, depressed artist who's on the verge of sadness.
And I go up, you like this? Yeah, I do. Okay.
Where would you put it? Do you have a place for it? Uh-huh.
Well, would you like to buy it? I can't afford this. $1200. Oh, God.
Yeah, it's way past that person's budget.
Of course, they came here to that show to buy soy candles, for God's sake.
And they just stumbled into my tent and saw something that catches.
And that's the thing about art.
Most people are going to say, oh, that's pretty or that sucks.
But there's always that magic once or twice in a show.
Okay, here's what I do.
It's $1200. I have financing available.
$400 now and then the rest six months from now.
Get a sale. Once, well, not usually. Sometimes that's enough.
Okay, so from that person's perspective, here she walks out with this ginormous,
really gorgeous work of art.
I, on my income statement in revenue, by law I have to put $1200 in revenue.
But that is in fact a lie. That's not what happened in terms of reality.
The reality is that I got $400.
So what really happened here was that I got $400 in cash debit and I got $800 in accounts cash
and in accounts receivable I got $800 on the debit side.
I promise I wouldn't do this, so I'm doing it, aren't I?
And then over here, but revenue, I've got the credit of $1200.
So it all matches up and everyone sees $1200, well damn, you're good.
No, I'm not nearly as good as it looks because I haven't got the $1200.
So we in finance have to correct this mess, this wrongness from the financial statement called the income statement.
We have to fix it. That's where changes in net operating work and capital come.
And I'll get into that on Monday to some extent.
But here's what's going to happen. $1200 is what I say happened.
However, the reality is that this account right here, this current asset, went up by $800.
So relative to the revenue that I am reporting, my free cash flow suffered $800, went down.
So I have to subtract that change in current assets because that way I'm honestly reflecting what the true change in free cash flow was.
Now, ultimately, what will happen is that I'll get the $800, so the credit will happen there.
And those two will wash and I'll get that.
So when the current asset drops by $800, my free cash flow rises.
That's what we have to do, is make those corrections for what revenue is saying that free cash flow isn't doing.
Now take the other side of this.
Madam, I decided to hire you as my assistant at art shows.
For the show, I shall pay you $300 for the show.
So I will reflect on my income statement and expense wages of $300.
But that's not what happened because I'm not going to pay you right away.
You're faced with a show, you're exhausted, I made you carry the $1200 pound.
Can I get paid now fat boy?
And I say, well, I'll pay you at the beginning of next month.
You say, now, wait a minute, you asshole.
I said $300, but it didn't happen.
So you see in that case, my wage expense looks like I spent $300.
But, okay, here's $100.
Damn, now go away, I'll see you next month.
So what happens is that my expense in operating expenses was wages payable, operating expenses, I say I spent $300 wages.
However, that's not what really happened.
Cash credited only $100.
And wages payable credits the other $200, which matches the $300 here.
In other words, I'm saying I spent more than I really did.
So ultimately I'll pay you and it'll wash, but the reality is that when a current liability goes up,
that is a freedom of that opens, lifts free cash flow relative to operating expenses.
I said $300, but because wages payable went up by $200, I really saved $200.
I lifted the free cash flow by the amount that I didn't pay.
And then ultimately, so free cash flow goes up.
Eventually I'll pay her, she comes in with a couple of very large people with ball bats, so I pay her free cash flow.
I will pay her eventually, and then wages payable will go down.
So when that current liability goes down, that hurts free cash flow.
Now what do you have to remember from this?
Put this on your notes.
Get it on there.
I mean, you could even get this as a tattoo.
It really looks good, or not.
Okay, maybe not.
But you remember this.
Just be able to identify, okay, what happened here?
Well, a current asset went up, or a current liability.
Okay, so now, the next one, depreciation expense.
My favorite example is one of my own.
These days I do landscape photography, and I do original artwork, which you can see on Amazon.
You can find my account on Instagram if you're interested in seeing my artwork.
But back in the day, and you'll still see me walking around with my camera equipment here,
if I've got a gig on campus to do.
But I got a portrait lens about five years ago.
$4,500.
For God's sake, that's expensive.
And when you look at it, you'll say, oh, that's insane.
It's huge.
And it's for photography.
I used to do a lot of product, model, portrait photography.
Okay, so $4,500.
Out of my pocket, it just disappeared.
$4,500.
It just went to be with Jesus.
But I can't say $4,500 as an expense.
I'm not allowed to.
You see, I have to, by the rules, I have to what they call capitalize it.
I put it onto my total assets, my assets, long-term assets, go up.
And then every year, for five years, I get to expense, depreciate some of it.
If I did straight line, that would mean $900 a year.
Goes onto my financial statements, onto my income statement.
That's not what happened.
There's no $900 anywhere in what really happened.
What really happened was I spent $4,500.
And it is nowhere on that income statement.
So what we have to do is we have to correct that.
Every year that there's $900 subtracted, we have to add it back.
Because there was no, you don't write a check to depreciation expense.
It just didn't exist.
So every year that I subtract that $900 of depreciation, I have to add it back to the income statement.
But in that first year, when I actually spent $4,500, I have to subtract that because that really was out of my pocket.
And it hurt like hell.
So you see, I'm motivating the idea that the income statement is not, the financial statements are not telling the story.
They're telling a rule-based story that is absolutely valuable to the information constituencies.
And most of them will just look at those financial statements and they'll take them at face value.
We in finance have to do two things.
One, we have to fix the numbers.
And then we have to say why.
What happened here?
What does this mean for the future?
Now, as far as financial statements go, I don't think they show this particularly to you in accounting classes.
But some of it should ring a bell when I tell it to you this way.
There are five financial statements.
One of those is the core.
It is the reservoir of information.
The other ones are rivers that flow into that reservoir.
The core statement is the balance sheet.
But the income statement, let's start with that one.
The income statement.
That produces one line.
It is a long calculation to produce one line.
It produces the net income.
And that flows to the statement of retained earnings.
Then that flows to the stockholders' equity section of the balance sheet.
Over here, the statement of cash flows.
Now here's something.
We had, a long time ago, back when I was young and still believed in the world and my immortality,
we had another name for this.
I don't know if they ever taught you this.
We used to call it the sources and uses statement.
Now that was very descriptive because what this one does is it helps us in finance.
Because it tells us, okay, in operations, how much did accounts receivable go up or down?
How much did current liabilities go up or down?
It tells us what I was talking about there.
It begins with cash at the beginning.
How much cash was in the coffer at the beginning?
And then in different categories, it says added to that or subtracted from that was this much actual cash.
Okay, accounts receivable went up.
That would be a subtraction.
Wages payable went up.
That would be an addition.
So it's showing what the actual flows of cash were back and forth.
And then it's got these sections like the cash generated by investments, cash generated or used by financing activities,
cash generated or used by other categories.
And it also adds back the depreciation, which they know really isn't an expense.
So it's actually an addition to cash.
So they have the cash at the beginning.
Then they have, okay, net income for this year and then plus any accounts receivable that go down,
minus if accounts receivable, it just plus you build a factory.
That would be a big minus because you spent all that money.
Plus, well, we got dividends from the stock investments the company made.
So that would be an addition.
So it's added and subtracting actual cash.
And then they take the cash at the beginning and add how much was net of all these activities,
and you get the cash at the end.
That flows over here to the very first line of the balance sheet, cash and marketable securities.
That's where it comes from.
So the balance sheet is simply all these flows.
I've taught you that the income statement is a flow through a year,
and the balance sheet is the stock at the end of the year, the stock of capital at the end of the year.
Yeah, this is what it is.
These rivers are flowing from all of these other financial statements, oh, God, into the balance sheet.
So that gives you, but there's one more.
This is one that is oftentimes ignored, the notes to the financial statements.
They are a veritable candy store of information.
They'll tell you about the details of executive compensation, the details of lease agreements, the details.
Some of it is numbers that you wouldn't find anyplace else except in the notes to the financial statement.
And it also has all kinds of other goodies as far as qualitative information that is useful to us in terms of warnings.
As a matter of fact, I was taught long ago that you can use the notes of the financial statement to warn investors away from your company.
And I was even given the boilerplate.
The last note in the financial statements is this boilerplate.
If it's really a risky small startup, put this in there.
And then the shareholders can't find some shareholder derivative lawsuit to sue you.
It's right there in the public statements.
So these are all the different ways that you can use a note.
So it's worth it for you to look through those.
But remember that the Securities and Exchange Commission is the only primary source for the financial statements.
And in those, I will show you where to look for a lot of useful stuff.
Every company must provide all of its financial statements in an Excel spreadsheet.
Now, that spreadsheet might have 50 tabs, but I'll show you where to go and how to get them together,
the ones that are important, these big five or the big four.
And once you've got those, you've got the Excel sheet.
You can make up quick little pretty graphs, add a blank worksheet, do some calculations, financial analysis calculations.
I'll show you how to do that.
We'll be using Excel extensively in this class.
It saves a lot of time working on paper using a handheld calculator.
You can do it all in Excel.
And thank you to the SEC because we've got the core, the giant data set all set up ready for us to use.
As a matter of fact, in another class, I'm showing how to use a chat GPT to go and get the financial statements of a company,
bring them down, and do what I want it to do in terms of financial analysis.
It's gotten that cool.
If you're interested, I'll even show you a little bit about that.
But you're going to have term papers to write in other classes, projects.
This is where it all begins.
Just get those financial statements down, and you're in business.
And speaking of you're in business, it's time for you to take a quiz.
The quiz is in Canvas, and I'll write the password here on the board.
It opens in about two minutes.
But once you're finished with that, that's all I have for you today.
I thank you.