How to Read a Financial Statements and Financial Journalism (Series: Personal Finance & Investing Fundamentals 2.0)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger LLP
Panelists:
Richard Claywell – J. Richard Claywell CPA
John Levitske – Ankura Consulting Group
Michael Terrien – West Loop Financial LLC
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ABOUT THIS WEBINAR:
How to Read Financial Statements and
Financial Journalism
Journalists -- financial and otherwise -- are not paid to compare carefully the strongest
pro- and con- arguments of a proposition. Strong incentives push journalists toward
producing loud click-bait. There is no day of reckoning for their views, as there is for
investors who do as suggested. Readers, for their part, tend to click what confirms their
own biases. How can an investor separate the wheat from the chaff in financial journalism?
How can an investor look at the financial statements of a potential investment and decide
for herself what the numbers mean? These are the topics for this webinar.
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ABOUT THIS SERIES: Personal
Finance & Investing Fundamentals 2.0
This webinar series is intended for the investor who has a beginning to intermediate level of
investing experience and knowledge. It assumes you know the difference between stocks and
bonds, and the difference between investing in publicly traded stock and investing in a mutual fund
that, in turn, invests in publicly traded stocks. It assumes further that there are good many things
you do not know but which you are quite capable of picking up quickly. The series begins with
fundamentals, such as the concepts of alpha and beta and how to approach reading financial
statements and financial journalism. The series then turns to look closely at certain alternative
investment objects of fascination: investment in VC/PE/HF (private equity, venture capital, and
hedge funds) and investment in "hard" assets like real estate.
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EPISODES IN THIS SERIES
4/24/19 Episode #1:
Alpha, Beta & Other Key Concepts
5/22/19 Episode #2:
How to Read Financial Statements and Financial Journalism
6/19/19 Episode #3:
All About Asset Allocation
7/24/19 Episode #4:
More About Stocks
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #2:
How to Read Financial Statements
and Financial Journalism
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WHAT ARE FINANCIAL STATEMENTS?
• The summarized results of a business’s financial transactions over a
designated period of time
• They show total income, expenses, cash balances, level of debt, and
more
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SOURCE OF DATA FOR FINANCIAL
STATEMENTS
• Accounts are the categories into which the effects of transactions are recorded,
and from which financial reports are created.
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FIVE MAJOR ACCOUNT CATEGORIES:
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Assets:
What you
own
Liabilities:
What you owe
Equity:
Net worth /
level of
investment
Income:
Proceeds from sales
Expenses:
Costs of operations
Financial Position
Operations

CHART OF ACCOUNTS
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Sample Income Accounts:
• Sales revenue
• Other income
Sample Equity Accounts:
• Owner’s equity
• Retained earnings
Sample Asset Accounts:
Current Assets
• Cash
• Inventory
• Accounts receivable
• Fixed assets
• Equipment
• Property
Sample Liability Accounts:
• Accounts payable
• Credit card payable
• Loan payable
Sample Expense Accounts:
• Rent
• Cost of Goods Sold (COGS)
• Marketing
• Office supplies
• Payroll
• Professional fees

FINANCIAL STATEMENT
COMPONENTS
• Income Statement
• Balance Sheet
• Statement of Cash Flow
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INCOME STATEMENT / PROFIT & LOSS
STATEMENT (P&L)
• Shows the performance of your business over a period of time
• Resets at the beginning of each new accounting period
• Summarizes all revenue generated by the business
• Summarizes all expenses incurred by the business (by category)
• Calculates the net profit or loss, or “bottom line” = (Income – Expenses)
• Tells how well the business is operated
• P&L is different from cash in that it may include non-cash accruals of various kinds,
e.g. depreciation
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REVIEWING THE INCOME STATEMENT
• How is revenue trending?
✓ Month-to-month; against same period last year (considers seasonality)
• How are expenses trending?
• What are the highest categories of expenses?
• Which expenses are fixed, which are variable?
• What is the cost of goods sold?
• How do expenses (as a % of sales) compare to others in the industry?
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REVIEWING THE INCOME
STATEMENT WILL TELL
• Is the enterprise profitable?
• What is its profit margin?
✓ Profit / Sales
• What is its gross profit margin?
✓ (Sales – COGS) / Sales
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BALANCE SHEET
• Snapshot of the business at a point in time
• Accumulates over the lifetime of the business
• Shows the net worth of the business
• The balance sheet always balances (ASSETS – LIABILITIES) = EQUITY
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LINK BETWEEN BALANCE SHEET
AND INCOME
• Profit or loss is taken from the bottom line of the income statement and recorded
on the balance sheet in the retained earnings equity account
• Retained earnings accumulate over the life of the business
✓ When a business operates at a profit, it increases in equity (is worth more)
✓ When a business operates at a loss, it decreases in equity (is worth less)
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REVIEWING THE BALANCE SHEET
• Liquidity: Can the company meet its payment obligations?
✓ Cash balance
✓ Working capital: Current assets – Current liabilities
✓ Current ratio: Current assets / Current liabilities
• Cash flow management
✓ How much inventory is present? How fast is it being sold?
✓ Is inventory on the shelf collecting dust?
✓ Are physical inventories conducted monthly, annually, never?
o Inventory turns: (COGS / Inventory balance)
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REVIEWING THE BALANCE SHEET (cont’d)
• How high is the accounts receivable balance?
✓ How quickly is A/R being recollected?
✓ Days sales outstanding: (AR / Sales) * # of days in period
• Debt management
✓ What are the total debt obligations?
✓ What is the total equity in the business?
✓ How leveraged is the company?
o Debt-to-equity ratio: Total liabilities / Total equity
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CASH FLOW STATEMENT
• How did the cash come and go?
✓ The cash flow statement uses information from the firm’s balance sheet and
income statement to identify the net sources and uses of cash for a specific
period of time
✓ The sources and uses of cash are organized into cash from operating
activities, investing activities, and financing activities
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PICTURE THE PROBLEM
• The format for a traditional cash flow statement is as follows:
• Beginning Cash Balance:
✓ Plus: Cash Flow from Operating Activities
✓ Plus: Cash Flow from Investing Activities
✓ Plus: Cash Flow from Financing Activities
o Equals: Ending Cash Balance
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NET WORKING CAPITAL
• We can thus measure a firm’s liquidity by computing the net working capital
= current assets – current liabilities
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FIRM LIQUIDITY AND NET WORKING
CAPITAL
• If a firm’s net working capital is significantly positive, it is in a good position to
pay its debts on time and is consequently very liquid
• Lenders consider the net working capital as an important indicator of firm’s
ability to pay repay its loans
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THE CASH FLOW STATEMENT
• The Cash Flow Statement is used by firms to explain changes in their cash balances over
a period of time by identifying all the sources and uses of cash.
✓ Source of cash is any activity that brings cash into the firm. For example, sale of
equipment
✓ Use of cash is any activity that causes cash to leave the firm. For example, payment
of taxes
Change in Cash Ending Cash Ending Cash
= —
Balance for 2018 Balance for 2017 Balance for 2018
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CASH FLOW ANALYSIS
• Why did the cash balance decline from 2017 to 2018?
✓ Accounts receivable increased, representing increase in uncollected cash from credit
sales; and representing use of cash to invest in accounts receivable
✓ Inventory increased, indicating use of cash to procure inventory
✓ Equipment increased, indicating use of cash to invest in equipment
• In general,
✓ An increase in an asset account = use of cash
✓ A decrease in an asset account = source of cash
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CASH FLOW ANALYSIS (cont’d)
✓ Accounts Payable, credit extended to the firm increased; thus source of cash
increased due to accounts payable
✓ Long-term debt increased, indicating a source of cash
✓ Short-term debt decreased, indicating use of cash to pay off the debt
✓ Retained earnings increased, representing a source of cash to the firm from the
firm’s operations
• In general,
✓ An increase in a liability account = source of cash
✓ A decrease in a liability account = use of cash
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CASH FLOW ANALYSIS SUMMARY
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Sources of Cash Uses of Cash
Decrease in an asset account Increase in an asset account
Increase in a liability Decrease in a liability account
Increase in an owner’s equity account Decrease in an owner’s equity account

DOUBLE-ENTRY ACCOUNTING
• Every business transaction will affect at least two accounts
• If only one side of the entry is done, the accounting system will become out-of-
balance
• Example: Company writes a check to DailyDAC for $1,000 to place an
advertisement
✓ Its cash account is reduced by $1,000
✓ Its marketing expense account is increased by $1,000
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ACCOUNTING METHODS
• Cash-based accounting
✓ The business records transactions when payment is made or received (cash
exchanges hands), not when the business event occurs
• Accrual-based accounting
✓ The business records transactions when the business event occurs, regardless
of whether payment has yet been made or received
✓ Accounts payable and accounts receivable accounts are used
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ANALYZING FINANCIAL STATEMENTS
• To get optimal management information, financial statements should be
compared against other numbers, for example:
✓ The business’s expectations and needs (budget-to-actual)
✓ The business’s competitors and industry norms (benchmarking)
✓ The business’s historical performance (trending)
✓ Each other (ratios)
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BIASES OF INVESTORS I
• House Money Illusion: gains from investment seem less real, so not treated
with the same care as initial savings from toil
• Backfire Effect: doubling down on our beliefs when exposed to opposing
viewpoints (“We ARE in a Bull Market!”)
• Confirmation Bias: Seek out only that information which confirms what we
already believe (“My go-to is Bull Market News!”). A cure: see research of The
Good Judgment Project, at www.goodjudgment.com
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BIASES OF INVESTORS II
• Anchoring Bias: Clinging to irrelevant piece of information when estimating
value (“I paid $900 for that, so it is worth much more than the current market
price of $38.50”)
• Recency Bias: Using the recent past as a guide to the future (2006: “Look at
those real estate prices increase! Gotta get in on this flipping game!”)
• Blind-Spot Bias: The tendency to think the aforementioned biases afflict them
but not me
• Loss Aversion Bias: Feeling more pain from the occurrence of a loss than
pleasure from the occurrence of a comparably sized gain
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BIASES OF EVERYONE, INCLUDING
ECONOMISTS AND JOURNALISTS
• http://25cognitivebiases.com/ Links to and discusses “The Psychology of Human
Misjudgment,” a speech given by Charles Munger at Harvard University in 1994, in
which he discusses 25 cognitive biases and their application in life and business.
• Misbehaving: The Making of Behavioral Economics. By Richard H. Thaler. New York:
W.W. Norton & Company, 2015. Thaler is the 2017 Nobel Laureate in Economics
• Thaler: there are “econs” (rational actors and utility maximizers) and “humans”
(constrained by biases, limited information, limited attention spans, and contrary
passions). Many economists are humans, though for research purposes most presume
that human beings in the mass can be usefully regarded as econs.
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BIASES OF FINANCIAL ANALYSTS
• “A Really Great Time for Analyst Groveling,” Jason Zweig, Wall Street Journal (March
13, 2017)
• Jonathan Milian and Antoinette Smith, accounting professors at Florida International
University, studied language used by analysts on conference calls with public company
CEOs [16.000 earnings conferences from 500 companies from 2003 to 2016]
• Found that analysts groveled – using excessively complimentary terms to address CEOs
• Analysts grovel because they know that CEOs are humans, not econs, and will grant
analysts more access for praise like “great quarter,” “nice,” “amazing,” and
“phenomenal”
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EXPLAINING MARKETS MOVEMENTS
OF THE DAY
• Journalists often boil down their reports about the day’s market movements by attributing
them to reactions of investors to news. E.g., latest unemployment reports, the rise or fall in
tension in the Middle East
• In fact, the journalist is asserting what caused attitudes, which in turn caused behavior of
millions of disparate actors in the markets
• This is to adopt the authority of social science – which is difficult to do well -- without
attention to social science norms
• At best, these attributions are educated guesses and generalizations. It is in fact impossible
for a journalist to assess and summarize the motivations of millions of market participants
with too much certainty
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SOME SOCIAL SCIENCE RESEARCH
NORMS
• Careful hypothesis formation
• Clearly specified research question
• Operationalization of concept into collectible and measureable data
• Data collection and measurement
• Falsifiability: specifying what data conclusions render the hypothesis false; recognizing
that correlation is not causation
• Replication
• Survey research: asking questions (are the questions loaded?), of a bunch of people
(representative sample? large enough?), and counting up the results (proper statistical
measures of significance? and (are results likely the product of random chance?)
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SOCIAL SCIENCE AND FINANCIAL MEDIA BIAS
• Shengle Lin, “Stock Return and Financial Media Coverage Bias,” (2011) see
http://www.haas.berkeley.edu/groups/finance/Lin_JobMktPaper.pdf
• *Media coverage biased in long run toward past winners; biased in the short run toward
extraordinary winners and losers [looking at publications form Dow Jones News
Services and the Wall Street journal from 1979 to 2007]
• Diego Garcia, “The Kinks of Financial Journalism,” (2015) see
http://www.unc.edu/~garciadi/writing_v15.pdf
• *positive returns have smaller impact on content than negative returns; past returns
influence media content when they are negative [looking at general finance news in New
York Times, and Wall Street Journal from 1905 to 2005]
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EVEN SOCIAL SCIENCE CAN ERR
• “Wall Street Critic Takes Aim at Commodities,” Ira Iosebachvili & Timothy Puko,
Wall Street Journal (Apr. 17, 2017). Regarding work of Campbell Harvey,
Professor of Finance at Duke University
• *more than half of all research performed by academics and analysts is “likely
false” – mine enough data and you can find a result that backs up your idea
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MOST PSYCHOLOGICAL RESEARCH
CANNOT BE REPLICATED
• The Reproducibility Project, see “Estimating the Reproducibility of Psychological Science, Science
(Aug. 28, 2015) at
• http://science.sciencemag.org/content/349/6251/aac4716.full?ijkey=1xgFoCnpLswpk&keytype=r
ef&siteid=sci
• Project examined 100 experiments reported in papers published in 2008 in three high-ranking
psychology journals.
• Assessing whether the replication and the original experiment yielded the same result according to
several criteria
• Found that about one-third to one-half of the original findings were also observed in the
replication study
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FINANCIAL JOURNALISM INCENTIVES
• Five (5) incentives that lead information to be created
✓ “Pay Me” – subscription model
✓ “I want to sell your attention to somebody else” – advertising model
✓ “I want to change how you think about the world” – nonprofit model
✓ “I want your vote” – partisan model
✓ “I just want to talk” – expression model
Source: https://www.theatlantic.com/business/archive/2016/12/information-
bubbles/509039/
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ABOUT THE FACULTY
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Jonathan Friedland – jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his
job simply: to make money for clients whenever possible and to protect their interests at every
turn. Licensed in four states, Jonathan’s transactional work focuses on representing private
funds and other owners of private businesses, and the businesses they own. He regularly
advises on M&A activities, structuring new ventures and restructuring old ones, and on other
commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10
by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State
University of New York at Albany, magna cum laude (in three years) and from the University of
Pennsylvania Law School. He clerked for a federal judge before entering private practice and
served for several years as an Adjunct Professor of Strategic Management at the University of
Chicago’s Graduate School of Business. Jonathan is lead author and editor of several significant
treatises, several chapters in other treatises, and scores of articles on law and business.
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John Levitske – John.Levitske@ankura.com
John Levitske is a Senior Managing Director at Ankura, focused on business valuation and complex financial
disputes. He has served as a senior advisor to companies, owners, executives, and legal counsel in business
disputes, shareholder disputes, and M&A transactions regarding issues of valuation, finance, damages, and
accounting. John is based in Chicago.
With more than two decades of Big Four public accounting and international consulting experience, John is
seasoned in business valuation, financial analysis, economic damage quantification, forensic accounting,
retrospective solvency analysis, and post-merger & acquisition accounting calculations. He handles appraisals
of healthy and distressed companies for buyouts of shareholders and creditors, transaction planning, estate
and gift taxation, financial accounting, bankruptcy proceedings, and litigation disputes.
John has provided consulting and expert witness testimony services and has served as a neutral party in
arbitration and mediation. He has testified as an expert witness in the US and Europe in depositions, hearings,
bench and jury court trials, and domestic and international arbitration (ICC, SCC, AAA, JAMS, FINRA, and ad
hoc arbitrations) and has served as a neutral arbitrator. In addition, he has rendered binding decisions on
disputed matters.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/john-levitske/
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Michael Terrien – mterrien@westloopfinancial.com
Michael S. Terrien is the founder and Managing Member of West Loop Financial LLC
(WLF). WLF is a registered investment advisor (RIA) committed to disciplined, evidence-
based investing and personalized, comprehensive financial planning designed to help
clients build their tomorrows while guarding against the pitfalls on the road today and in
the future. West Loop Financial is a member of The BAM Alliance (BAM), a nationwide
network of like-minded advisors. Mr. Terrien brings the intensive commitment to client
service and attention to detail developed over a legal career spanning more than 20 years
to West Loop Financial.
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Richard Claywell – richard@biz-valuation.com
Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in
Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified
Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in
Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been
valuing closely held companies since 1985. Richard’s practice is restricted to business valuation, economic
damages, profit enhancement and exit planning. Richard received his Bachelor of Science in Accounting in
1979 from the University of Houston – Clear Lake. He then received certification as a Public Accountant in
1983. Over the years, Richard has earned additional accreditations that relate to business valuations, economic
damages and fraud. Richard has been an instructor for the National Association of Certified Valuation Analysts
for many years, has been an instructor for the Internal Revenue Service and the International Association of
Consultants Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and
is responsible for the business valuations materials being taught in 55 countries. Richard has taught business
valuation or economic damage courses in China, Korea, Taiwan. Richard has performed over 1,000 business
valuations since 1985. Richard has testified in Texas County Court, Texas State Court, Bankruptcy Court and
Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes,
personal injury, wrongful termination and divorce.
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QUESTIONS OR COMMENTS?
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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ABOUT FINANCIAL POISE
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How to Read a Financial Statements and Financial Journalism (Series: Personal Finance & Investing Fundamentals 2.0)

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