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Accounting Allah shmoop financial statement notes F sharp B flat

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middle C It helps sometimes if you sing along while

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you're doing the accounting dance and no matter what the

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notes are one big theme you have hopefully gleaned by

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now is that the numbers aren't the numbers at least

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not by themselves In a vacuum like you don't just

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add up the dollar bills in the cigar box at

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the end of the day and call that profit Most

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numbers have some edgy backstory and need further explanation than

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just plunking a twelve thousand three hundred eighty two dollars

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thirty one cents in the column for extruded plastics drink

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cup costs So how was that number calculated Was it

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new plastic we bought that month or quarter Or was

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it old plastic that had been sitting is a balance

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sheet asset on our shelves And we finally got around

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to shipping it out the door in the form of

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Ah Barbie Or did we get a bulk pricing deal

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like the first ten thousand Cups cost us a dime

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and then the next twenty thousand cost us eight cents

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and the next one hundred thousand cost seven Well how

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do we record those figures Or if we're looking at

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buying or investing in someone else's business Well how were

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those numbers recorded Like when they say that they had

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eight point three to four million dollars in profits did

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they All right well you get the gist skepticism Is

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your friend moving on One major consideration As you do

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your accounting is going to be the business type Not

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is in times new Roman Aerial or Helvetica but rather

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what kind of business is it Heavy industry computer software

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weed killer chemical producer And this points to the first

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type of note a company usually includes in its financial

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statement What it does for a living that is Does

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this company sell extruded plastic for a buck a pound

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Or does it sell conformed plastic with fake blond hair

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and a little pink in it for twenty dollars a

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unit The doll making biz sounds a bit more fun

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than the extreme plastic thing there but it's important in

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context Is you wino through the financial statement notes you'll

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have to hunt for when you review publicly filed documents

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or a documents you have to create some day and

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you know file yourself Why does all this matter Because

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the fundamental dynamics of being in the oil drilling business

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require a completely different focus Then say a computer search

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company to build transport set ensure and installed just one

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offshore ocean based oil rig cost some three toe four

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hundred million dollars if not more So A half a

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billion bucks goes out the door before even a penny

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is recouped Massive capital Massive focus on cost of capital

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and interest rates and appreciation and risk management Yeah storms

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happen Compare this structure with a computer search company Islets

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Column Shmoop GLE two guys a garage a computer for

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about one hundred fifty grand Well within a year that

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little company already has a flow of revenues modest revenues

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but already clearly proven little business if they want to

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grow really big while a capital raise of twenty thirty

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million bucks is probably all they'll ever need tiny Capital

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in So the focus is all about competitive dynamics and

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scale Because if all you need's a little bit of

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capital well that there's probably tons and tons of rivals

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out there right Well on the other end of the

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world By the time an oil rig is greenlit investors

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have deep certainty that there is in fact oil one

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hundred eighty nine feet down and more and that the

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world demand for oil will be you know there and

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at some Pryce worthy of digging in the first place

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So the fear isn't that suddenly competitors will monopolize oil

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production and or the world won't suddenly and not need

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oil anymore but with computer search Well if you were

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a competitor of Google's in two thousand five it's likely

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you watched your traffic slowly or even quickly decline and

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or evaporate Teo film nothing because the masses migrated quickly

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tow their service and had they wanted it well Google

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could have paid back all of the capital they ever

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raised after just a few years in business The same

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is Oh so not true for oil rigs which often

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take decades to pay off another financial statement No it

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has to do with accounting styles because well they're a

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bunch of different one like this and this and this

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But if you're the one drawing up papers while you

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have to state it outright so that readers know what

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they're reading For example there are tons of ways cos

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depreciate assets they've paid for and you have to note

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the method You're using the assumptions you're making right Will

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your factory last ten years or twenty years or thirty

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Will it be worth five million bucks at the end

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or twenty million Or will it be worth less than

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zero you know or worse like you have to a

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five million dollars for a salvage company to then clean

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up all the landfill nuclear waste and haul it away

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Well the remaining value of a tractor smelting company can

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be very different If the company was aggressive and appreciating

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it versus not did they take a straight line appreciation

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system reducing that hundred million dollar initial investment by eight

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million a year for ten years To then hold the

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factory's value it twenty million box at the end there

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Or did they accelerate depreciation to be something like twenty

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million the first year than eighteen The second and sixteen

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and fourteen thin just tiny amounts afterwards We'll all kinds

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of tax strategies come into play as well because the

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more you depreciate upfront the less profits you have But

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also the less taxes you pay and all this has

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to be clearly noted And if it isn't even to

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a rookie accounting person reading the filings of a private

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company odds are good that the company is up to

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something Oh so not good that they're trying to hide

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or obscure some bad piece of financial data Or at

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least that's a healthy skeptical attitude to have as you

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peruse when fully caffeinated The method of valuing inventory is

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another note All kinds of ways to make the company

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look less or more profitable almost at will you'll note

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the magic phrase one time charge Yeah when companies make

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filings almost all quote one time unquote things are never

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In fact one time charges they happen again and again

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and again in the company Calls it out is a

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one time charge because they want the world to think

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that they are in fact more profitable than they really

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are on an ongoing basis So you can imagine all

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kinds of one time charges for the write down of

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unsold inventory is a common cause of setting pants on

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fire Gap regulations demand that a company X expressly convey

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how the amount they're carrying for inventory value is stated

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in other words is at the lower of the company's

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cost in buying that inventory or market price I'ii comic

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it could get for it Net of shipping and fees

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by selling it on eBay or wherever lower can also

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mean the cost of replacing that inventory And you've got

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all kinds of wiggle room When you define these terms

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in real life you'll see the phrase lower of cost

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of acquisition or market meaning that the company is holding

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the inventory at whatever price they bought it book value

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until convinced otherwise that it should lower that value And

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there's more creative license here that hits a CZ Well

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if they really went to self forty thousand pair of

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last year's hot fashion pumps with the red soles on

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them right would they really still get five hundred bucks

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a pair for them today Well that's what their stated

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book value or cost wass But if they had to

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dump Money Bay well they'd likely get a whole lot

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less so if they eventually do decide to write them

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down or off they'll usually be a note patient in

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their filings that there was a one time charge to

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write down last year's and or the year before his

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inventory the charge of a twelve point seven million bucks

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Odd Well this is noted as a one time charge

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But isn't inventory always going out of style particularly the

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fashion industry Aren't shoes always getting old So why is

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this called out as a one time charge right down

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versus just a charge called inventory We couldn't sell Yeah

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odd Think shmoop West Airlines having stored a bunch of

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fuel at low prices and then a bomb went off

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in Tehran and oil prices skyrocket Well Shmoop West still

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needs the oil to run its airline and would have

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to essentially by and replace the oil in their coffers

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now at higher prices Will they paid an average of

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three bucks a gallon for that fuel And they own

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one hundred million gallons of it or at least contractual

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rights to buy it at those prices for the next

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year But now world prices have skyrocketed toe five dollars

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a gallon So wouldn't they have to write up the

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value of their fuel inventory from three hundred million toe

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five hundred million dollars Good question But answer Well Not

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necessarily They still have to use fuel to run their

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business and they use a lot of fuel It'll all

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be gone in six months anyway so lots of ways

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they could think about recording those expenses Really Gap says

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Use the more conservative number So whatever that number is

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still using another note refers to things that happened after

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the financial filings were made That is if a ten

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Q covers the period from April one to June thirty

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But then a Fourth of July fireworks accident burned down

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the factory Well you'd look for a subsequent events note

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on the statements explaining what happened and how much it'll

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cost to fix Well these notes always seem to live

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in the way back of the filings pages So you

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actually do have to turn and look at every single

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page of the four hundred seventy two filings Yeah our

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thought for you Double espresso There's a further gradation Here

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is toe whether an event is recognized or unrecognized Wait

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it happened It's bad But for some reason the accountants

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are actively legally choosing Tio You know ostrich recognizing given

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event requires math estimates of damage and details as to

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what materially would harm the business going forward Like what

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It bring earnings estimates down a dime a share of

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the next few years What it we don't know An

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unrecognized event is something that was bad like the CEO

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slept with an employee on camera in the office then

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uploaded the whole sordid scene to YouTube to make a

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few extra bucks for herself But the CEO herself is

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settling the subsequent lawsuit So it is unrecognized right because

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she's personally covering the expenses much easier to account for

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But well it gets noted just in case it turns

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out this was ah whole companywide Siri's of events and

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company counsel expects lawsuits coming in by the dozen in

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the next few months Alright well intangibles or another note

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worthy thing on most public accounting filings they get their

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own lines Was there a mark up in value Did

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a patent get sold or contested or used or expired

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Yeah you'd note that event as well So you just

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bought your hated rival You're now putting together one set

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of books for both companies combined and you want to

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note that fact the implication being that if you started

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a fire people well the fun is only beginning Prognosticator

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looking at those sets of numbers will estimate that cheaper

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plastic extrusion costs are coming Mork quote rightsizing unquote is

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coming which is the PC term for employees firings and

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hopefully higher unit sales pricing is coming as well as

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the two rivals combined can now extract more dough from

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the kindly loving people at Amazon who sell your products

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or At least that's your hope And you note all

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of these mumblings on the filings if you're the head

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bean counter putting everything together Okay So what about employee

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benefits Do they have any notes What do those benefits

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cost that employees even have any benefits Well the big

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buzz word in that world pension liability Yeah that is

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you contribute X dollars a year per employee based on

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some set salary or base rate or percentage of salary

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Are you current INF paying those obligations or have you

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delayed those payments Betting that the stock market will go

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up big and bail you out Because cash is tight

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right now and you wanted to keep it Or are

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you rich and employee pension amounts Because your money managers

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put all of it into Amazon stock and how they

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just played golf Well if you are quote overfunded unquote

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it might make you ripe to be a takeover target

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for an LBO firm Could use your own cash and

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pension extras in part Just a fund buying you Yeah

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can happen Okay Moving on then There's contingent liability That

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CEO employees YouTube sleeping thing from earlier Yeah that one

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That's a contingent liability if the employees she slept with

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decided to sue the whole company as well as her

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cause Company probably has deeper pockets and she does The

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net lawsuit likelihood would have to be noted here with

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the logic that if investors were looking at this set

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of numbers they have the right to know that there

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is likely a big fat charged to the company coming

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along with the tunnel lawyer bills down the line Well

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you'd have to make some estimate or range at some

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point that it cover what you guess the damages will

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be and they'll be ugly no matter what Finally credit

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claims credit claims against the company have to be noted

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as well as the company paid its bills on time

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Is there a dispute as to how much the company

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owes for that plastic that had bits of lead and

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steel in it The vendor thinks it's the company's fault

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and well you know of course vice a versa Yeah

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it all just has to be noted or disclosed Doh

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Ray me Fah soh la ti doh Yeah wrong kind

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of notes But if you can keep singing through all 00:12:31.074 --> [endTime] this stuff Well you'll be in good shape

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