8/12/2019 Q1 1WhatAreEquityInvestors VideoTranscript PDF

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Video Transcript File: What are equityinvestorsand what information do they use to makeinvestment decisions?

Slide 1 (:12s) Welcome to Introduction to Accounting Preparing for a Users Perspective. Whatare equityinvestorsand what information do they use to make investmentdecisions?

Slide 2 (:09s) This is Bill. Bill currently sits on a pile of resourcesbut wants to make his pileof resources grow.

Slide 3 (:05s) But how can he make it grow?

Slide 4 (:06s) Bill is considering becoming an investor.

Slide 5 (:23s) When people like Bill, investtheir resources in ideas, projects, and companies,they often receive some form of ownership equity in the investment. When such investmentsare in corporations, the investorsreceive ownership sharesto represent their ownership and

are called equity investors.

Slide 6 (:14s) When equity investorsinvestin a companythey increase their ownersequityclaimsagainst the company and thereby provide equity financing.

Slide 7 (:33s) For example, during Googles businesslifetime, it has obtained a variety ofresourcessuch as cash, vehicles, furnitureand buildings. Resourcesowned and/or controlledby an entityare called assets. Like all businesses, Google must obtain its assetsby financingthem from the only two sources available, 1) owners, or 2) creditors(which are the focus of ournext learning topic).

Slide 8 (:25s) Therefore, at all times, Googles total assetsWILL and MUST ALWAYS beexactly equal to the financingit received to obtain those assets. This logic leads to one of themost fundamental formulas in all of business called the balance sheet equation. It is written asAssets= Liabilities+ Equity.

Slide 9 (:47s) In other words, if you wanted to quickly see what assetsGoogle had at the end ofthe year 2012 and how they were financed, you could obtain itsbalance sheeteither directlyfrom Googles website, or from the Securities Exchange Commission (SEC) which we willlearn about later. On that balance sheetyou would notice that Google had $94 billion in assets.You would also notice that Googles ownershad $72 billion in equityrepresenting their claimsagainst Google as a result of their equity financing, and Google had $22 billion in liabilities to

its creditorsfor their creditors claimsagainst Google as a result of their debt financing. Asyou can see, the balance sheet will ALWAYS balance.

Slides 10 (:12s) We will later learn the advantages and disadvantages that companiesface as aresult of being financedvia debtor equity.

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Slide 11 (:19s) Balance sheetusers can learn more about the companyby reviewing its sourcesof financing. For example, if we knew that a companyhad $100 in assets, we would alsoimmediately know that the companyhad $100 in financingthat provided those assets.

Slide 12 (:16s) Even better, if we knew that a companyhad $100 in assetsAND we knew that

it had $30 of liabilities, we could solve for the unknown owners equityand arrive at $70.

Slide 13 (:51s) A companysequity can also be referred to as its net assets. This concept of

net assets begins with the standard balance sheet equation. Assets = Liabilities + Equity.Assume a company has $200 in assets and $120 in liabilities. You could solve for equity bydeducting the $120 of liabilities from both sides of the equation to arrive at the following netassets equation AssetsLiabilities = Equity. A companys net assets, $80 in this example, arethe same thing as owners equity and represent the amount of the companys assetsthat theownerwould net AFTER the companypaid off all of its liabilities.

Slide 14 (:15s) A companys total debt financingas would appear within the liabilities

account, is also referred to as temporary financingbecause it usually must be repaid within aspecific periodof time.

Slide 15 (:27s) Equity investors, like Bill, investin companiesto achieve financial returnswhich help them grow their pile of resources. Bills equity investmentscan provide himfinancial returnsin two different ways:1) He can receive dividend incomewhen the companieshe invests in pay out their profits inthe form of stock, cash or other asset dividends.

Slide 16 (:34s) He can also achieve gains on the saleof his ownership shareswhen he sellsthem to other investorsat higher prices.

a. For example, if Bill took one shareof Google stockthat he purchased originally for $100 andthen sold it to a new investorfor $800, his $800 sales price could be broken out into two pieces1) a $100 return OF his investmentand2) a $700 return ON his investment called a gain on sale.

Slide 17 (:20s) b. Watch out though, if Bill sold his $100 share for only $70, he would onlyreceive a $70 return OF his investment and would incur a $30 Loss OF his investment.

Slide 18 (:15s) Equity financingis also known as permanent financingbecause there isusually no specific time frame when the companiesare legallyobligatedto pay back theowners original investments.

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Slide 19 (:59s) Investorslike Bill want to make good investment decisions, but making goodinvestment decisionsis not always easy.To assist them in making the best investmentchoices possible, investorswill strive to obtainand properly analyze a variety of different information.Some informationused by investorsis disorganized and comes from a variety of random

sources at random points in time, such as: news reports, social media, and personal experiences.Other information is quite well-organized and is often produced by governmentalor non-profitagencies, such as housing,unemploymentand productiondata. For profit companies alsoprovide well-organized investor information such as Bloomberg, Moodys and Standard &Poors.

Still other information comes in pre-specified formats, such as the general purpose financial

statements.

Slide 20 (:17s) The general purpose financial statements are produced directly by thecompaniesthemselves.

When properly analyzed, general purpose financial statementscan be extremely helpful toinvestorsand creditorswhen making investment and lending decisions.

Slides 21 to 26 (:28s) A companys general purpose financial statementsconsist of its incomestatement, statement of equity, balance sheet, statement of cash flows, and related footnotedisclosures.

We will spend the rest of this course studying the general purpose financial statements withthe hope that you will learn how to prepare, read and use them when making investingandlendingdecisions.