SFA_Chapter_2_only__Sept_2006

SFA_Chapter_2_only__Sept_2006 - Chapter 2: Strategy and...

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Chapter 2: Strategy and Financial Statements Financial statements are probably the first thing students should turn to when attempting to understand a firm's situation. They give students a basis for making assessments of firm performance, financial condition, financial trends, comparative financial analysis, specialized follow-up of financial anomalies, and financial forecasts. However, the most important aspect is for the student to interpret the financials statement’s overall meaning. What are the implications? Students, analysts, and managers all have to answer the question of: WHAT DOES IT ALL ADD UP TO? To do all this often requires the student to "crunch the numbers." However, it should be possible to pick up a firm's financial statements and in a matter of minutes, make some quick estimates and get a rough assessment of the firm's financial condition. For most managers, the accountants and financial analysts will actually do the number crunching while the middle or upper level manager will interpret what the numbers mean. To interpret the numbers and determine their strategic implications, a manager will need to understand how the numbers are constructed.
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Income Statements Exhibit 2.1 presents what is titled, "Consolidated Statement of Operations" from a typical entertainment company’s Annual Report . This same report is also known as an "income statement" or a "profit and loss statement." The first two sections are "Revenues" (i.e., sales) and "Expenses." The revenue section shows three different sources of revenue: subscriptions (monthly fee that members pay); advertising (revenue from ads); and other (e.g., product licensing fees and from technical support, consulting and training services). The second section is costs and expenses. Cost of revenue includes network expenses including personnel and equipment, sales and marketing including advertising costs and direct marketing costs among others. , In this case, product development costs are those associated with improving current products. “General and administrative” expenses include salaries, consulting fees, legal fees, and bad debt expenses among other items. “Amortization of goodwill and other intangible assets” represents the excess price over fair value of tangible assets of acquired firms. “Acquired in-process research and development” expenses are the costs associated with discontinuing some of the projects of the acquired firms.
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Exhibit 2.1 - Consolidated Statement of Operations (in millions) Entertainment Company 2006 2005 2004 2003 2001 REVENUES Subscription services $18,959 $15,657 $4,400 $3,321 $2,183 Advertising, commerce and other 7,680 82,260 1,986 1,027 566 Other 14,322 13,249 500 456 365 TOTAL REVENUES 40,961 37,166 6,886 4,804 3,114 Cost of Revenues 24,315 20,533 3,458 2,669 1,825 Sales and Marketing 9,916 9,079 1,015 816 629 Product Development 0 0 303 292 243 9,916 9,079 623 417 333 Amortization of goodwill & intangibles
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SFA_Chapter_2_only__Sept_2006 - Chapter 2: Strategy and...

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