October 20 th , 2008 presentation:

1. October 20th, 2008 presentation: Accounting basics and Club portfolio

2. Accounting Basics "FASB stands for the Financial Accounting Standards Board. They are among the most useless people on the planet and they are standing in the way of patriotic American commerce. Imagine the lamest Star Trek-watching nerds hellbent on punishing the successful and cool kids with their nitpicky rules."

3. Why is Accounting important to (Value) Investors? • Needed for… • Ability to accurately and properly interpret financial statement data • Use in valuation modeling • Discounted Cash Flow Model, etc. • Understanding the health of a business

4. Why is Accounting important to (Value) Investors? • Identifying past, current, and forecasting future performance • Return on Equity, Free Cash Flow, other ratios • How it affects the manner in which its components are reported • Mark-to-market regulations, etc. • This has become a major hotspot lately; if you’re interested, do a Google search for “FAS 157”

5. Financial Statements • These are what publicly traded companies issue through the SEC and GAAP to report quarterly and yearly performance • Many sites (Yahoo, Google Finance, etc.) report semi-accurate data • However, often times they are not the best source for in-depth research • Best to look at the actual filing • Sources? • investing.businessweek.com • sec.edgar-online.com

6. Financial Statements • What are the three (primary) financial statements? • Balance Sheet • Also called Statement of Financial Position • Income Statement • Also called Statement of Earnings • Statement of Cash Flows

7. The Income Statement • This statement lists all of the companies revenues, expenses, gains, and losses for a given period of time • Example: Apple, Inc. • Revenue = Sale from an iPod, Macbook, etc. • Expense = Cost of goods sold (items needed to manufacture a product), salaries/wages, research & development, etc.

8. The Income Statement • Important to distinguish differences within each type of account • Is that revenue part of our normal operations or from interest/investments? • What type of expenses is the company incurring and in what volume? • Is this gain or loss occurring frequently or once in a lifetime?

9. The Income Statement • What is depreciation/amortization? • When a company purchases an asset, it has a limited useful life (5 years, 20 years, etc.) • Depreciation is an annual expensing of the original purchase price of said asset • There are many methods available, but the principle remains the same • Key point: Depreciation in a NON-CASH expense

10. The Income Statement • Net Income and Earnings Per Share • Ultimately, every company reports net income (or loss) for the given period • It’s important to know everything to goes into calculating this number • Earnings Per Share (EPS) = • Allows comparison of company profitability regardless of overall size

11. The Income Statement • Here’s a shortened version of Apple’s:

12. Statement of Cash Flows • Similar to the Income Statement, as it provides information about a company during a given period of time • However, the Statement of Cash Flows only deals with what the company did with their CASH • A company may be profitable according to their Income Statement, but they may have trouble generating cash

13. Statement of Cash Flows • The different components • Cash flows from… • Operating activities • Investing activities • Financing activities

14. Statement of Cash Flows • Useful for determining with the company did with its cash • Are they collecting a reasonable amount from their normal operations? • Are they spending a lot of their cash on new assets, prospects for expansion, etc.? • If they have an excess amount sitting around, are they paying out a dividend?

15. Statement of Cash Flows • Free Cash Flow (FCF): • Operating Cash Flow  Inflow or outflow from everyday operations • Capital Expenditures  Outflow used to acquire or upgrade physical assets such as machinery, buildings, etc. • Good indicator of whether or not the company is expanding and still has cash on hand to pay its current debt obligations

16. Statement of Cash Flows • Here’s a shortened version of Apple’s:

17. The Balance Sheet • Reports a company’s assets, liabilities, and shareholder’s equity at an exact point in time • Differs from the previous two in this aspect; they cover a period of time whereas the Balance Sheet is a “snapshot” • Useful in determining the company’s structure

18. The Balance Sheet • The different components: • Assets • These represent future economic benefits • Can be current and non-current • Ranked on the Balance Sheet in order of their ease of liquidity (how easy can you convert this asset into cash?) • The most liquid assets are listed at the top (cash, marketable securities, etc.)

19. The Balance Sheet • Liabilities • These represent future economic sacrifices • Can be current and non-current • Important to know how much debt the company is obligated to pay in the next few years • Shareholder’s Equity • Represents the owner’s interest (that’s you!) in the company • Contains an important account: Retained Earnings • Takes a company’s net income and shows if they pay it out as a dividend or re-invest it

20. The Balance Sheet • Important for analyzing the capital structure of the company • Do they have a lot of cash relative to their debt? If not, do they have a lot of liquid assets? • How do they finance their investments? Mainly through stock issuance or with bonds/borrowing? • Do they have a lot of intangibles (goodwill, patents, etc.)?

21. The Balance Sheet • Let’s take a look at the handout • This is Apple’s condensed Balance Sheet for the years 2004-2007 • What’s good about it? What might not be so good? • How might they be structured differently from a newly formed company?

22. Other • At a later date we will introduce more advanced concepts of accounting • Financial Ratios • Profitability, Leverage, Solvency, Liquidity, Efficiency • Comparison to other companies in the same industry • Valuation modeling • Is the company’s equity more than its market cap? • Anything else you guys would like to learn more about

23. Questions?

24. Club Portfolio

25. Goals • Show by realistic example how to choose investments • Provide a sample portfolio of value investments for a college-aged investor • Learn about different stocks and companies and what makes them attractive investment opportunities

26. Goals • Encourage discussion and debate • Maintain records of the portfolio to learn from mistakes and successes

27. Parameters • Start with $20,000 cash • Trades cost $7 (ScottTrade pricing) • Placing a trade requires a majority of present and voting members to approve • Provide rationale and analysis for each investment on the appropriate forum page

28. Analysis • Reason for buying? • Selling Strategy / Expected Duration? • Reason for Selling? • Analysis (What went well, what did not)