What is the primary purpose of US GAAP?

In the US, the Securities and Exchange Commission ("SEC") authorizes the Financial Accounting Standards Board ("FASB") to determine the set of accounting rules followed by publicly traded companies. Under FASB, financial statements are required to be prepared in accordance with US Generally Accepted Accounting Principles ("US GAAP"). Through the standardization of financial reporting and ensuring all financials are presented on a fair, consistent basis – the interests of investors and lenders are protected.

What are the main sections of a 10-K?

In a 10-K, you'll find the three core financial statements, which are the income statement, cash flow statement, and balance sheet. There'll also be a statement of shareholders’ equity, a statement of comprehensive income, and supplementary data and disclosures to accompany the financials.

What is the difference between the 10-K and 10-Q?

10-K: A 10-K is the annual report required to be filed with the SEC for any public company in the U.S. The report is comprehensive and includes a full overview of the business operations, commentary on recent performance by management, risk factors, disclosures on changes in accounting policies – and most importantly, the three core financial statements with supplementary data. 10-Q: A 10-Q refers to the quarterly report required to be filed with the SEC. Compared to the 10-K, this report is far more condensed in length and depth, with the focus being on the quarterly financials with brief sections for MD&A and supplementary disclosures. Additional Differences: A few more differences are 10-Ks are required to be audited by an independent accounting firm, but 10-Qs are only reviewed by CPAs and left unaudited. 10-Ks must also be filed ~60-90 days after the fiscal year ends, whereas 10-Qs must be submitted ~40-45 days after the quarter ends.

Walk me through the three financial statements.

1. Income Statement ("IS"): The income statement shows a company's profitability over a specified period, typically quarterly and annually. The beginning line item is revenue and upon deducting various costs and expenses, the ending line item is net income. 2. Balance Sheet ("BS"): The balance sheet is a snapshot of a company's resources (assets) and sources of funding (liabilities and shareholders' equity) at a specific point in time, such as the end of a quarter or fiscal year. 3. Cash Flow Statement ("CFS"): Under the indirect approach, the starting line item is net income, which will be adjusted for non-cash items such as D&A and changes in working capital to arrive at cash from operations. Cash from investing and financing activities are then added to cash from operations to arrive at the net change in cash, which represents the actual cash inflows/(outflows) in a given period.

Walk me through the income statement.

The income statement shows a company’s accrual-based profitability over a specified time period and facilitates the analysis of its historical growth and operational performance. Net Revenue (or Sales) The income statement begins with revenue (often called the “top line"), which represents the total value of all sales of goods and delivery of services throughout a specified period. Less: Cost of Goods Sold COGS represents the costs directly tied to producing revenue, such as the costs of materials and direct labor. Gross Profit Revenues – Cost of Goods Sold = Gross Profit Less: Selling, General & Administrative ("SG&A") Operating expenses that are not directly associated with the good or service being sold (e.g., payroll, wages, overhead, advertising, and marketing). Less: Research & Development ("R&D") R&D refers to developing new products or procedures to improve their existing product/service offering mix. EBITDA Gross Profit – SG&A – R&D = EBITDA EBITDA stands for: Earnings Before Interest, Taxes, Depreciation & Amortization Less: Depreciation & Amortization ("D&A") D&A is a non-cash expense that estimates the annual reduction in the value of fixed and intangible assets Operating Income ("EBIT") EBITDA – D&A = Operating Income (or EBIT) EBIT stands for: Earnings Before Interest and Taxes. Less: Interest Expense, net Interest expense from debt, net of interest income generated from investments. Pre-Tax Income ("EBT") EBIT – Interest Expense, net = Pre-Tax Income (or “Earnings Before Tax”) Less: Tax Expense Tax liability recorded by a company for book purposes. Net Income EBT – Tax Expense = Net Income (referred to as the “bottom line”)