Fol­lowing much antic­i­pa­tion, Face­book filed for an ini­tial public offering (IPO) after U.S. mar­kets closed on Wednesday. Reports have spec­u­lated that the social media giant’s offering — pending approval from the Secu­ri­ties and Exchange Com­mis­sion (SEC) — could top rival Google Inc.’s 2004 IPO, which holds the record for the largest U.S. Internet IPO, raising $1.9 bil­lion at a val­u­a­tion of $23 bil­lion. We asked David Sherman, pro­fessor of accounting in the Col­lege of Busi­ness Admin­is­tra­tion, to ana­lyze Facebook’s IPO prospectus and explain what it reveals.

Facebook’s IPO is the first sig­nif­i­cant look for the public and investors into the social net­working giant’s finan­cial state­ments. What has it revealed?

Above all, it con­firms that Face­book is a very strong, prof­itable com­pany, with rev­enues of $3.7 bil­lion in 2011 — more than 450 per­cent of its 2009 rev­enues and almost double those in 2010.  Net income has also grown at a sim­ilar pace, reaching $1 bil­lion in 2011. Facebook’s finan­cial sit­u­a­tion is in sharp con­trast with that of Renren, com­monly referred to as the Chi­nese Face­book, whose IPO in 2011 showed a small loss in a recent quarter, or Zipcar, whose recent IPO prospectus reported accu­mu­lated losses of $32 mil­lion over the past three years.

Facebook’s IPO also revealed details of its cost struc­ture and rev­enue stream. Face­book is one of the remark­able com­pa­nies in that once its plat­form was built, it encoun­tered only modest ser­vice costs asso­ci­ated with growth in rev­enues, much like Google, LinkedIn and many soft­ware busi­nesses. While much of Facebook’s rev­enues come from adver­tising, a large part of the non-​​advertising rev­enues come from com­puter gaming rev­enues from users of Zynga, another 2011 IPO that reported strong rev­enues and profits.

One inter­esting com­po­nent of Facebook’s IPO filing was the inclu­sion of a letter from founder Mark Zucker­berg, detailing his moti­va­tion for the com­pany. Zucker­berg noted, “we don’t build ser­vices to make money; we make money to build better ser­vices.”  The entire letter is unusual, though Face­book is pro­ceeding in a tra­di­tional route, unlike Google, which auc­tioned shares for its IPO.

What ques­tions about Facebook’s per­for­mance still remain? 

The company’s val­u­a­tion has not been dis­closed, but is spec­u­lated to be between $80 bil­lion and $100 bil­lion. The strength of Facebook’s busi­ness is impres­sive, but the question—whether this val­u­a­tion of 80 to 100 times earn­ings offers attrac­tive future appre­ci­a­tion and the impli­ca­tions for future growth—is one that investors will need to grapple with.

Addi­tion­ally, Facebook’s 800 mil­lion mem­bers are an incred­ibly valu­able asset that does not appear on its bal­ance sheet. Facebook’s finan­cials cannot answer ques­tions such as whether the mem­ber­ship could grow, or whether Face­book could increase the time spent by each user on its site and/​or find new ser­vices that will sup­port the growth in adver­tising and other rev­enues Many man­agers would con­sider it a blessing to be chal­lenged to find ways to ben­efit from an 800-​​million member cus­tomer base, so the ques­tion is going to be which paths Face­book will choose to do just that.

Now that Face­book has filed for an IPO, what, if any­thing, will change? 

From this point on, much more of Facebook’s activ­i­ties and finan­cial per­for­mance will be a public record updated on at least a quar­terly basis. For example, the key ques­tion about Facebook’s poten­tial for future growth and many other busi­ness ques­tions will be readily tracked by fol­lowing quar­terly fil­ings with the SEC, as well as in Facebook’s increased com­mu­ni­ca­tions with secu­rity analysts.