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Monthly Archives: October 2016

Tips to Read Financial Statements

While the EPS captures the media headlines and is the most-sought-after metric, it is only part of one of the three major components of a company’s financial documentation that is necessary to understanding both the company’s performance and its financial condition. The other two major financial statements are the balance sheet and the statement of cash flows.In the upcoming weeks, I will highlight each of the individual financial statements. The objective of this series of lessons is to provide the necessary tools to ascertain financial information and understand those reports without having to possess a CPA (certified public accountant) or CFA (chartered financial analyst) designation. (However, it is the role of the CPA to audit and certify the financial statements that will provide the independent account.)This week, let’s kick off this multipart examination of financial statements by looking at the annual report and 10-K for a lesson on financial and regulatory reporting.

Getting Started:

As is often the case with any research project, we start by aggregating information and materials that will provide the basis for our financial investigation. This prompts the questions: What should I look for? and where can I find it?Here is our punch list:– Form 10-K
— Form 10-Q
— Annual Report
These documents can usually be found in the “Investor Relations” section of a company’s Web site.

Form 10-K

This is an official filing made by the company to the Securities & Exchange Commission (SEC). On the face of the 10-K will be a statement to this effect:”Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended 1996 .”The 10-K will contain the following sections:– An overview of the company and selected financial data
— Director and senior management information including executive compensation, as well as signatures by senior management and the directors
— Consolidated financial statement including the Report of Independent Registered Public Accounting Firm
— Notes to the financial statements

Form 10-Q

This is the quarterly and slimmed-down version of the 10-K. It typically only includes unaudited financial statements, notes to the financial statements and a management discussion.

Annual Report

This publication is sent to all shareholders and is available from the company for prospective investors. The annual report varies from company to company. Some companies, such as Ruth’s Chris Steak House, just slap a glossy cover over a 10-K and call that an annual report.On the other hand, some companies, such as Amylin Pharmaceuticals, put together a professionally designed annual report that incorporates a message to shareholders; a business overview featuring (but not limited to) the company’s management, products, operations and new endeavors; the auditors’ report; consolidated financial statements; and notes to all of those statements.Yet another spin is the summary annual report as presented by Duke Energy. Duke issues a summary annual report with plenty of gloss, a business overview and financial statements. However, ultimately, the Duke report refers readers to its 10-K for more details.

Step by Step:

Now that you know what reports to obtain, let’s walk through what you should do with them — before you even get to analyzing the financials.

Step 1. Read the Report From the Independent Accounts

You want to ensure that the company has received an unqualified report. This means that the company has complied with Generally Accepted Accounting Principles (GAAP) and that the auditors found no material items that might cause an exception to GAAP and no financial conditions that might indicate that there are questions that the company can exist as a going concern.An unqualified report would contain language along these lines (as taken directly from the 2006 report of independent accountants for Amylin):

We have audited the accompanying consolidated balance sheets of Amylin Pharmaceuticals, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amylin Pharmaceuticals, Inc., at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, Amylin Pharmaceuticals, Inc., changed its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Amylin Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2007 expressed an unqualified opinion thereon.

As you can see, there are no issues or red flags. The one accounting change (“Amylin Pharmaceuticals, Inc., changed its method of accounting for share-based payments…”) was of a material enough nature to include in the report, but once you read the note to the financial statement you will understand that it is not a problem to be concerned with.

Step 2. Read the Letter From the CEO

The CEO (chief executive officer) is the leader of a company. In that capacity, not only does the CEO manage the current operations of the company, but he also sets the vision for the future. Thus, as an investor, what you want to hear from the CEO is where the company has come from, where it is and where it is going. On one end of the spectrum, some CEOs will use this section to cheerlead. On the other end, some will use it to be cathartic and talk about mistakes made and future challenges. Most CEOs’ letters are somewhere in between.

Step 3. Check Out the Senior Management Team and the Board of Directors

The management team and board of directors will tell you who is operating and who is looking over the company. High on investor and regulator watch lists are concerns over corporate governance. You want to avoid companies with managers or board member who have tarnished or shaky backgrounds. As an example of the flip side of this, while the board of directors at Apple has had to contend with options back-dating issues, the background of its members is highly reputable.

Step 4. Read the Business Overview

Companies will change over time. Its products and businesses will go through cyclical phases. Demand for old and new products and services will dictate future strategy. Economic and other market conditions will affect a company and industry.Expansion and growth are factors that investors will pay for. Reading the business overview will give you an idea of the company’s current products, competitive position and future plans.As you can see, there are some important things that you should do before you analyze a single number.

4 Steps to Merging Finances with Your Partner

 It’s not an easy thing to figure out. There are logistics to handle, habits to change, emotions to manage, and often it feels like there is never enough time in the day for any of it.

But successfully managing money together is key to creating a happy partnership, so here are four pieces of advice as you go through this process yourself.

1. Focus on Joint Goals, Not Joint Accounts

It’s tempting to get caught up in the logistics of joining your finances. How do you create joint accounts? Which accounts should you join? What if you want to keep some money for yourself? Does that mean your relationship is in trouble?

Ignore all of that. It doesn’t matter. At least not at the start.

What really matters are your joint goals. What are you working towards? What is your shared vision for the life you’re building together?

Start having conversations about what you each value and want out of life. Listen to each other so you can truly understand what’s important to the other person.

Find the goals you already have in common and make those the priorities. And start talking about how you can find middle ground on the others.

This communication is the real key to successfully merging your finances. All the rest is just logistics.

2. Establish Shared Expenses

Now, about those logistics…

ne easy place to start is with your everyday expenses. Things like cable, internet, electricity, and groceries.

Decide which expenses you want to share and how you want to split them up. For example, if one person makes significantly more, maybe they’re responsible for a bigger share of certain expenses. That way each of you is left with some free money at the end of it.

3. Create a System

There are two main ways you can start sharing those expenses.

The first is to create a joint bank account where those bills are paid. Then you each are responsible for transferring money to that account on a regular schedule to cover the bills. This lets you practice managing a joint account without having to join everything.

Another option is to put each person in charge of certain bills. For example, one of you could handle the cable bill while the other handles the electricity bill. This kind of system may be easier to get up and running quickly.

Also, create a system for long term savings. I know someone who gave half their paycheck to their partner to invest for the long term. This might not be the right move for you, but start by discussing each of your current habits and how you might change those or improve on them as a couple.

4. Plan for Extra Money

Here’s something my fiance and I have done that’s helped us a lot.

In addition to our regular expenses and savings, we each have a number of “wants” that our extra money could go towards. For example, I’d like to get curtains and my fiance wants gardening supplies.

So we made a list of these things and put them in priority order. And now any time we have some extra money, we simply refer to this list and put it towards the top item.

This makes these decisions easy, limits the opportunity for arguments, and ensures that we’re both able to indulge a little bit.

Top 5 Financial Mistakes Beginners Make

 There’s a lot of financial advice out there. Enough that your head starts to spin when you try to take it all in, understand it, and figure out which pieces are relevant to you.

I’d like to make it a little easier for you by pointing out some things NOT to do.

Here are five of the biggest mistakes I see people making when they first start trying to improve their financial situation.

1. Obsess Over Investment Strategy

There’s often this feeling that if you can just find the perfect investment strategy, your financial success will be guaranteed.

So you read articles, listen to the experts on TV, and tinker with your investments, all with the hope of finding an edge that puts you over the top.

But here’s the truth: the returns you earn, good or bad, have almost no impact on your bottom line until you’re a decade into the process.

What does matter, a lot, is your savings rate. It may not be sexy, but simply saving enough money is far more important than any other investment decision you can make.

2. Forget About Irregular Expenses

If you’ve tried budgeting before and it hasn’t worked, chances are you’ve been undone by all the unexpected expenses that keep popping up.

Your car needs a new tire. Your daughter has to go to the doctor. Your friend gets married in another state.

Here’s the thing: a good budget knows that these kinds of expenses aren’t unexpected. You may not know when they’re coming, but you do know they’re coming.

And you can make them a part of your regular budget simply by saving ahead for them each month. That way the money will already be there when you need it.

3. View Cutting Back as the Only Option

Cutting spending is often the quickest and easiest way to free up room in your budget for the big financial goals you’d like to achieve. Which is why it’s usually a great first step.

But it’s not the only option.

In fact, the biggest long-term results often come from finding ways to increase your income. So don’t be shy about asking for a raise or starting a side hustle. Those are powerful tools that can expand your world of financial opportunities.

4. Think That Credit Card Debt Is Normal

According to NerdWallet, the average American had $15,310 in credit card debt as of 2015. So I guess debt is normal in the sense that a lot of people have it.

But if you want to be financially healthy, you need to accept that credit card debt cannot be part of your life. It’s actually the biggest obstacle that’s keeping you from reaching your goals.
If you have credit card debt, getting rid of it is almost always a top financial priority. That may mean that other financial goals have to wait, but the sooner you get rid of your debt, the sooner you’ll be able to make real progress towards the things you care about most.

5. Look for Easy Fixes

Unfortunately, there is no easy button when it comes to your finances. The solutions are often fairly simple, but they take time, dedication, and hard work before they truly pay off.

For example, creating an account with and linking all your bank accounts is a great start to the budgeting process. But the app itself won’t solve all your problems.

You’ll still need to take the time to categorize your expenses, both up front and on a regular ongoing basis. And you’ll need to use that information to take action and make changes in how you use your money.

No single app or tactic is going to fix everything for you. You have to take ownership of your situation and do the hard work to make it better.

Focus on What Matters

There’s a lot of noise out there in the world of personal finance advice. And your job is to filter that out so that you can focus on the small number of things that actually matter for your personal goals.

Avoiding common mistakes is a big part of doing that well. And if you can avoid the five mistakes above, you’ll be off to a good start.

Tips to Manage Finances and Save Money

 To help you manage your money and reach your saving goals:

Create a Budget

A budget is your plan for how you will spend money over a set period of time. It shows how much money you make and how you spend your money. Creating a budget can help you:

  • Pay your bills on time.
  • Save for unplanned expenses in the future.
  • Prepare for retirement. offers more information about what to include in your budget, along with aspreadsheet (PDF, Download Adobe Reader) that you can use to create your own.

Consider Ways to Save

Saving money involves looking for deals and buying the items you need at the best price, using coupons or by shopping around. Check out’s spending tips for ideas. You can also set up a saving plan to help you save for emergencies and for short term and long term goals. offers tips on saving, including helping you achieve your saving goals.

Invest in Long Term Goals

You can save for long term goals, such as retirement (PDF, Download Adobe Reader) and college education, by investing. The U.S. Securities and Exchange Commission offers tips to help you be aninformed investor.

Saving for Retirement

As you approach retirement, there are many things to think about. Experts advise that you will need about 80 percent of your pre-retirement income to continue your current quality of life. The exact amount, of course, depends on your individual needs. Some important factors to consider include:

  • At what age do you plan to retire?
  • Can you participate in an employer’s retirement savings plan, such as a 401(k) plan, or a traditional pension plan?
  • Will your spouse or partner retire when you do?
  • Where do you plan to live when you retire? Will you downsize, rent, or own your home?
  • Do you expect to work part-time?
  • Will you have the same medical insurance you had while working? Will your coverage change?
  • Do you want to travel or pursue a new hobby that might be costly?

Resources to Help You Prepare for Retirement

To help you plan for retirement:

  • Find practical tips for building retirement savings in the Top 10 Ways to Prepare for Retirement(PDF, Download Adobe Reader).
  • Use a retirement calculator to find out the best age to claim your Social Security benefits.
  • myRA can help you start saving for retirement, when you don’t have access to an employer-sponsored plan or lack other options to save.
  • Find out the trade-offs between taking your pension in a monthly payment or in a lump sum(PDF, Download Adobe Reader).
  • Social Security pays benefits that are on average equal to about 40 percent of your pre-retirement earnings. You may be able to estimate your benefits.
  • Learn how you can boost your retirement savings at
  • If you have a financial advisor, talk to him or her about your plans.

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Savings Bonds

U.S. savings bonds are one of the safest types of investments because they are endorsed by the federal government and, therefore, are virtually risk free.

Visit TreasuryDirect, a website from the U.S. Department of the Treasury, to learn about savings bonds, treasury bonds, and securities: how to buy and redeem your investments, what to do in the event of the death of an owner, and much more. TreasuryDirect is your one-stop shopping site for government securities where you can find information about the wide range of savings options, including EE/E, HH/H, and I savings bonds.

Manage and determine the value of savings bonds using these tools:

  • Savings Bond Calculator
  • Savings Bond Wizard
  • Redemption Tables

You can give savings bonds for many occasions, such as birthdays, weddings, and graduations. Learn how to give savings bonds as gifts.

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Treasury Securities

Treasury securities are debts issued by the federal government’s Bureau of Fiscal Service. When you buy a treasury security, you are lending money to the federal government for a set amount of time. In return the government promises to pay you back the entire amount, also known as the face value, when the security matures.

There are several types of treasury securities:

  • Treasury Bills—Short term securities that mature between a few days and 52 weeks.
  • Treasury Notes—Medium term securities that mature between one and 10 years.
  • Treasury Bonds—Long term securities, with a 30 year term that pays interest every six months, until the bond matures.
  • Treasury Inflation-Protected Securities (TIPS)—Securities with principle values that adjust based on inflation, but with fixed interest rates for five, 10, or 30 year maturities.
  • Savings Bonds—Securities that offer a fixed interest rate over a fixed period of time.
  • Floating Rate Notes (FRNs)—Securities with variable interest rates, so that as bank interest rates increase or decrease, the interest rates on the FRNs change in the same direction.

You can purchase treasury securities for yourself or as gifts. You can purchase them in several ways:

  • Banks, brokers, and other financial institutions through the Commercial Book-Entry System.
  • Online through Treasury Direct
  • Payroll savings plans
  • Public auctions

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A trust (or trust fund) is a legal entity that allows a person (the grantor, donor, or settlor) to transfer assets to another person or organization (the trustee). Once the grantor establishes the trust, the trustee controls and manages the assets for the grantor or for another beneficiary—someone who will ultimately benefit from the trust. To help you decide if a trust is right for you, first consult a licensed attorney experienced with estate planning and trust matters.

Reasons to Set Up a Trust

Some common reasons for setting up a trust include:

  • Providing for minor children or family members who are inexperienced or unable to handle financial matters.
  • Arranging for management of personal assets, if you become unable to handle them yourself.
  • Avoiding probate and immediately transferring assets to beneficiaries upon death.
  • Reducing estate taxes and providing liquid assets to help pay for them.
  • The terms of a will are public while the terms of a trust are not, so privacy makes a trust an appealing option.

Types of Trusts

Trusts can be living (inter vivos) or after-death (testamentary). A living trust is one that a grantor sets up while still alive and an after-death trust is usually established by a will after one’s death. Living trusts can be irrevocable (can’t be changed) or revocable (can be changed), although revocable trusts don’t get the same tax shelter benefits as irrevocable ones do.

The most common type of trust is the revocable living trust. If there’s a specific purpose in mind for the trust, dozens of different options exist (charitable trusts, bypass trusts, spendthrift trusts, and life insurance trusts). Two types of trusts can help pay for long-term care services:

  • Charitable Remainder Trusts – This trust allows you to use your own assets to pay for long-term care services while contributing to a charity of your choice and reducing your tax burden at the same time. You can set up the trust so that you receive payments from the trust to pay for long-term care services while you are alive.
  • Medicaid Disability Trusts – These trusts are limited to persons with disabilities who are under age 65 and qualify for public benefits. Parents, grandparents, and legal guardians often set up these trusts to benefit people with disabilities and a non-profit organization manages the assets. This is the only kind of trust that is exempt from rules regarding trusts and Medicaid eligibility.