Accounting Principles and Concepts ppt

“The term ‘financial statement’ refers to a presentation of financial data, including accompanying notes, derived from accounting economic resources or obligations at a point in time

Presented to: American Bar Association

April 10, 2008

Objectives

To provide a basic understanding of

» Key accounting concepts

» Financial statements (what are they 7)

» Financial statement analysis techniques

= Regulatory governance

=» Auditor reports

= Ratio analysis

= Putting financial statements to use

" Hot Topics (e.g., Sarbanes-Oxley)

Accounting is the identification, measurement,

and communication of financial information about

economic entities to interested parties

Source: Kieso, Donald E and Jerry J Weigandt, /ntermediate Accounting

Eighth Edition 1995 NewYork: John Wiley & Sons

Periodic Reporting Accrual Basis

Owners’ and/or stockholders claims against assets

¢ REVENUES Income from sales and other sources

¢ EXPENSES Costs to company

“The term ‘financial statement’ refers to a

presentation of financial data, including

accompanying notes, derived from accounting

economic resources or obligations at a point in

time or the changes therein for a period of time in

conformity with a comprehensive basis of

accounting.”

Source: AICPA Codification of Statements on Auditing Standards, AU §623

Hi r r !

¢ Must be reviewed, not to form an

opinion, but to look for anomalies in the data

¢ Other company disclosures and

information

Financial Statements

Overview of Financial Statements

Financial Accounting Standards Board (FASB) states that a full set

of financial statements should include:

BALANCE SHEET Financial position at the end of the period STATEMENT OF INCOME

Income for the period

STATEMENT OF CASH FLOWS

Cash flows for the period STATEMENT OF CHANGES IN EQUITY Investments by and distributions to owners during the period

FOOTNOTES

Adequate disclosures to understand the financial statements

Hi r r !

các

is Pal

Assets Balance Sheet Objective:

Cash os seuurities s2 282 ¢ To provide reliable inform ation about

Accounts Receivable, net $4,464 a company’s economic resources and

Total current assets $15,450 ¢ A snapshot of financial position at a

Property, plant, and equipment $6,971 point In time

Deferred taxes on income $54 ¢ Sometimes called the Statement of

Loans and notes payable $1,479 Bal an Ce S h eel Eq U at lO N:

Accrued salaries, wages and commissions $488

Other liabilities $1,328 See handout “Balance Sheet Components” for further details

Stockholders’ equity:

Common stock and paid-in capital $1,535

Note receivable from stock ownership plan ($35)

Accumulated other comprehensive income ($470)

Less: common stock held in treasury ($1,034)

Total stockholders’ equity $18,808

Income Statement

Sales A -Cost of Sales

Earnings before provision for taxes on income $6,622

Net earnings (income) $4,800

Earnings per share:

Basic $3.45

Diluted $3.40

Income Statement Objective:

¢ To provide information about changes

in net resources that result from business activities

¢ Reveals financial performance during

a specific period of time

e For public companies, earnings per share will also be reported here

Income Statement Equation:

Earnings per Share (EPS)

¢ Calculated by dividing Net

Income (Earnings) by shares of

common stock outstanding

¢ Small fluctuations in EPS may

have a large impact on stock

li:

Qtr

ASSETS LI ABI LI'TI ES

Operate the business (fixed expenses);

Sell products for cash

ASSETS LI ABI LI TI ES

Cash $1,000 Accounts Payable

Inventory Short-term Loans

Accounts Receivable Long-term Debt

Property, Plant & Equipment TOTAL LI ABILITIES $0

Cash $1 ,000 Accounts Payable

Inventory $1 ,000 Short-term Loans

Accounts Receivable Long-term Debt $5,000 Property, Plant & Equipment $4,000 TOTAL LI ABILITIES $0

Cash $1 ,000 Accounts Payable

Inventory $1 ,000 Short-term Loans

Property, Plant & Equipment $4,000 TOTAL LI ABILITIES $5,060

Cash $1 ,000 Accounts Payable

Inventory $1 ,000 Short-term Loans

Accounts Receivable Long-term Debt $5,000

Property, Plant & Equipment $4,000 TOTAL LI ABILITIES $5,000

Step 3: Doing Business

i NewCo sells products totaling 5500

m Uses $200 jin inventory (for goods sold)

= Spends $200 fon operating expenses

Income Statement

INCOME STATEMENT

Revenue $500 Cost of Goods Sold $200 SG&A Expense $200

ASSETS LI ABI LI'TI ES

Cash $1 ,800 Accounts Payable

Inventory $1$800 Short-term Loans

Accounts Receivable Long-term Debt $5,000

Property, Plant & Equipment $4,000 TOTAL LI ABILITIES $5,000

PROFIT/ (LOSS) $100 iin FT OF

Cash $1 ,3900 Accounts Payable

Inventory $800 Short-term Loans

Accounts Receivable Long-term Debt $5,000

Property, Plant & Equipment $4,000 TOTAL LI ABILITIES $5,000

Paid-in Capital $1,000

THESE TOTALS TOTAL STOCKHOLDER EQUITY $1,000

SHOULD MATCH TOTAL LIABILITIES + $6,000 |

PROFIT/ (LOSS) $1 00 Th F T TF

+ or - Cash Provided or Used by INVESTING ACTIVITIES

+ or - Cash Provided or Used by FINANCING ACTIVITIES

Statement of Cash Flows ($ amts in thousands)

Depreciation and amortization 1,515

In-process research and development 54

Increase in deferred taxes (167)

Increase in accounts receivable (451)

Decrease (increase) in inventories 125

Accounts payable and accrued liabilities 57

Decrease in other current and non-current assets 143

Increase in other current and non-current liabilities 454

Net cash from operations 6,563

Additions to property, plant, and equipment (1,646)

Proceeds from the disposal of assets 161

Acquisition of businesses, net of cash acquired (68)

Proceeds from short-term debt 814

Retirement of short-term debt (1,485)

Retirement of long-term debt (28)

Proceeds from the exercise of stock options 292

Net cash used for financing (3,100)

Objective: To classify and report cash receipts and payments

other investment instruments

¢ Financing Discloses the inflows and outflows of cash due to the retirement and receipt of debt

In r r :

Financial Statements

Footnotes

Footnotes disclose financial information not contained in the basic

financial statements but still required by GAAP

Footnotes are necessary to fully understand the Financial Statements

Hi r r !

Financial Reporting & Disclosure

¢ Financial Accounting Standards Board (FASB)

¢ Securities and Exchange Commission (SEC)

Auditing & Professional Standards

¢ Before Sarbanes-Oxley Act (2002):

American Institute of Certified Public Accountants (AICPA)

¢ Now: Public Company Accounting Oversight Board (PCAOB)

for public companies and AICPA for private companies

Hi r r !

> Now includes separate report on internal controls

> Types of Audit Opinions:

Unqualified Opinion Qualified Opinion

Techniques & Ratios

Financial Statement Analysis

What Financial Statements Tell You:

¢ Measures capital structure and ability to obtain financing

*See handout “Ratio Analysis” for examples of specific ratios

Hi r r !

¢ Comparison for same company

using different periods

Comparative Analysis

¢ Comparative analysis to similar

companies and/or industry

Common-type Analysis

¢ Comparative analysis to

companies of similar type (e.g.,

size, complexity, etc.)

Equity Value / Share

Ave # Shares Outstanding

2008 2009 2010 2011 2012 1,100 1,210 1,331 1,464 1,611 (660) (726) (799) (878) (966) (231) (254) (280) (307) (338)

209 230 253 278 306

125 138 152 167 184

85 90 95 100 105 (80) (110) (115) (80) (80) (6) (2) (2) (3) (3)

124 116 130 184 206

2,105

124 116 130 184 2,311 1,654 at WACC of: 13.06%

2008 Wynn Resorts Forecast

Equity Value: High

Equity Value: Averàe

EquIty Value: Low

Equity per share: High

Equity per share: Averàe

Equity per share: Low

Market Multiples Example

Enterprise Value: High

Enterprise Value: Average

Enterprise Value: Low

¢ Financing agreements generally include one or more financial

covenants to enable the lender or investor to monitor the

financial performance of the company on a periodic basis The

reason for this is that lenders and investors want to minimize

their risk, but for liability and other reasons they do not want to

be involved in controlling the day-to-day management of the

¢ This covenant requires a company to maintain a certain

level of EBITDA, expressed as a minimum dollar amount

EBITDA is typically measured on a trailing 12 month basis

Net Income + Interest Expense + ‘Taxes

+ Depreciation & Amortization EBITDA

¢ Interest Coverage Ratio

¢ Measured as EBITDA/Interest Expense

¢ Used to determine how easily a company can pay interest

on outstanding debt

¢ The lower the ratio, the more the company is burdened by

debt expense FT

¢ Measured as Funded Indebtedness/EBITDA

¢ Used to determine the total amount of debt relative to

the cash flows of the company The higher the ratio, the more highly levered the company is

¢ Fixed Charge Coverage Ratio

¢ Measured as EBITDA-Cash Capex/Interest + Principal

¢ Indicates a firm's ability to satisfy fixed financing

expenses

¢ A ratio above 1.0 is desirable.

evelopment odal

nalysis of ratios included sing the model

Return on Total Assets

Sales to Total Assets

Weight Weighted Ratio factor ratio

Sales to Total Assets X 0.999 ===

Equity to Debt X 0.6 anne

Working Capital to Total X 1.2

Assets

Assets

Z - Score

2.99 - 1.81 Warning signs

Below 1.81 Big trouble — heading

toward bankruptcy

Begin reading a financial statement by knowing what

information it is intended to convey

Look for meaningful relationships, ratios and changes in

these ratios over time to extract useful information

Most companies’ accounting is not very complex and their

financial statements and notes should be fairly transparent

once you understand the basics of financial reporting

If anumber or performance trend appears questionable or

incorrect, ask questions and request the latest

correspondence with the company’s auditors

If those inquires do not satisfy you, ask your own financial

professional to take a look — there may be a problem

Hi r r !

Wesintein, Weiss & Ordubegian LLP

1925 Century Park East

American Bankruptcy Institute

American Bar Association

California Bankruptcy Forum

Financial Lawyers Conference

International Woman’s Insolvency

and Restructuring Confederation

Los Angeles Bar Association

Education

J.D., Southwestern University School

of Law

B.A., University of California at Irvine

Sharon Z Weiss joined the firm in 1997 as an associate and was welcomed as a partner on January 1, 2001 Ms Weiss has extensive experience in a wide area of insolvency matters from various perspectives, including representation of trustees,

individual and corporate debtors, creditors and creditors’ committees

Areas of Practice

In April, 2007, Ms Weiss was profiled as an Outstanding Woman Bankruptcy Lawyer

by Bankruptcy Law360 and has been names by the Los Angeles Magazine as a Southern California Superlawyer for 2005, 2006 and 2007 Ms Weiss has served as

lead trial counsel in bankruptcy and commercial litigation, including alternative

dispute resolution and has considerable experience in handling fraud and Ponzi scheme litigation, and bankruptcy appeals which have resulted in published Ninth Circuit opinions Her clients include debtors engaged in the consumer electronics, healthcare, restaurant, garment, entertainment and retail sales industries, and

creditors’ committees in merchandising, manufacturing and apparel industries Ms

Weiss has served as lead counsel in out-of-court workouts and in the bankruptcy

courts in cases involving such varied issues as disputed asset sales and financing, the avoiding powers, executory contracts, pension plans, claims priority, plan

confirmation, surcharges and the court’s inherent powers Ms Weiss was also

appointed to the Bankruptcy Mediation Program Panel for the United State

Bankruptcy Court, Central District of California in 2006 and appointed in 2007 as an

Attorney Settlement Officer for the United States District Court, Central District of California

In F T lI

Ms Weiss regularly speaks on an array of insolvency and business litigation matters to professional audiences at

regional, state and national levels She currently serves as the vice chair of the Executory Contracts

Subcommittee of the Business Bankruptcy committee and co-chair of the Woman Business Law Network of the

diversity Committee of the American Bar Association’s Business Law Section Ms Weiss has held other business

Law leadership positions including chair of the Law Student and Yong Lawyer Involvement Subcommittee, co-chair

of the Membership: Minorities, Women & Young Lawyers Subcommittee and vice chair of the Litigation

Subcommittee She is a member of the Board of Directors of the California and Los Angeles Bankruptcy Forums

and is a co-founding member of the Restructuring and Insolvency Professionals of Southern California Ms Weiss

is an active member of the American Bankruptcy Institute, American Bar Association, California Bankruptcy

Forum, Financial Lawyers Conference, International Woman’s Insolvency and Restructuring Confederation and the

Los Angeles Bar Association

Representative Matters

Death Row Records, I nc./ Marion “Suge” Knight: Currently representing largest creditor (claim value of $107

million) in all facets of the Death Row Records and Knight bankruptcy cases

International Norcent Technology, Inc./ Norcent Holdings, Inc.: Currently representing founder, President

and Chief Executive Officer of a distributor of consumer electronics with gross revenues of approximately $20

million in connection with companies’ chapter 11 bankruptcy cases, including critical strategic planning with

respect to $12 million federal court judgment against Debtor-companies and their President

MTI Technologies, Corporation: Currently representing bidder of assets and acquirer of claim in technology

oriented bankruptcy proceeding

In F T I