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INBA 6355 Financial

Statement Analysis

Lecturer/Facilitator Andre Taitt


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WHAT IS ACCOUNTING
Accountingis defined as the
process of identifying,
measuring, and communicating
economic information to permit
informed judgments and
decisions by the users of the
information.
Lecturer/Facilitator Andre Taitt
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WHAT IS
FINANCIAL STATEMENT ANALYSIS
F.S.Ais defined as the process of
examining financial statements and
related information in order to
permit informed economic
judgments and decisions.
The process can be improved by
experience and by use of analytical
tools. Lecturer/Facilitator Andre Taitt
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OVERVIEW OF FINANCIAL
STATEMENT ANALYSIS
1. Identify the industry
industrys economic characteristics
2. Identify company strategy
3. Assess financial statement quality
qualityadjust if
necessary
4. Analyze risk and profitability
5. Prepare forecasted financial statements
6. Value the firm

Lecturer/Facilitator Andre Taitt


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FINANCIAL STATEMENT ANALYSIS
Liquidity
Measures a firm
firms ability to meet its current obligations
Leverage (borrowing capacity)
Measures the degree of protector for long-
long-term creditors
Profitability
Measures the earning ability of a firm
Investor-
Investor-focused
Cash flow
Indicate liquidity, borrowing capacity, and profitability

Interpreted in comparison with


Prior ratios
Competitor ratios
Industry ratios
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Predetermined standards

Common-Size Analysis
The use of percentages is usually preferable to
the use of absolute amounts
Vertical analysis
All amounts of a year expressed as a percentage of
a base amount (e.g., net sales revenue, total
assets)
Horizontal analysis
Amounts for comparative years are expressed as a
percentage of the base year amount

Lecturer/Facilitator Andre Taitt


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Comparisons: Industry
Industry comparison complicated by highly
diversified companies
Comparisons: Caution
Ratios are subject to variance from:
Differing data
Inconsistent formula construction
Optional (elective) accounting treatment
Different fiscal year-
year-ends
Varying financial policies
Inconsistent basis (before or after tax)
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What Accounting Does


Accounting is a system that provides
information on:
Amounts of resources.
How resources were financed.
Results achieved by using resources.
For either:
Parties inside and outside of the organization.
Profit and nonprofit organizations.

Lecturer/Facilitator Andre Taitt


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Users of Accounting Information
There are several different groups of users of accounting
information. Each group has different interest in the company and
and
wants answers to different questions.

OWNERS AND PROSPECTIVE


OWNERS
CREDITORS AND LENDERS
EMPLOYEES AND THEIR UNIONS
CUSTOMERS
GOVERNMENTAL UNITS
GENERAL PUBLIC
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Financial Accounting
Coverts firms
firms day to day operating activities into
general-
general-purpose Financial statements
Primary financial statements:
Balance sheet.
Income statement.
Statement of retained earning
Statement of cash flows.

Common rules used so investors can compare


with other companies
companies financial statements.

Lecturer/Facilitator Andre Taitt


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Financial Accounting

Lecturer/Facilitator Andre Taitt


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Harmonization of
International Accounting Standards
Accounting standards can vary by country
Development is often in response to domestic

needs.
Problems caused by lack of harmonisation
Expansion of Int
Intl business and global capital
markets
Business and Governments have shown an

increased interest in harmonisation of International


accounting standards.

Lecturer/Facilitator Andre Taitt


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Traditional Assumptions
of the Accounting Model
Business Entity Matching
Going Concern Consistency
(Continuity) Full Disclosure
Time Period Materiality
Monetary Unit Industry Practices
Historical Cost Transaction
Conservatism Approach
Realization Cash Basis
Accrual Basis
Lecturer/Facilitator Andre Taitt
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Financial Statements Required by


GAAP/IFRS

Statement of Financial Position (Balance


Sheet). (Solvency)
Income Statement. (Profitability)
Statement of Cash Flows. (Sources/Uses
of cash)
All other goals of the business secondary
to Solvency and Profitability
Lecturer/Facilitator Andre Taitt
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Cash Basis
Recognize revenue when cash is
collected
Recognize expense when cash is paid
Usually does not provide reasonable
information about the earning capability
of the entity in the short run
Acceptability
Usually not GAAP/ IFRS
May be used if difference between cash basis and
accrual basis is not material
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Accrual Basis
More complex than cash basis
Revenue recognized when earned
(realization concept)
Expenses recognized when incurred
(matching concept)
Numerous year-end adjustments
required

Lecturer/Facilitator Andre Taitt


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Accrual Basis (contd)
Result is more representational of
financial condition
Supports the time period assumption
Modified accrual
Adjusts for buildings and equipment
Immaterial items
Specific standards have allowed the cash
basis

Lecturer/Facilitator Andre Taitt


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Terminology Cautions
Income revenue. (Profit Sales)
Net income increase in cash.
Retained earnings cash.
Accrual vs cash basis of Accounting
Revenues and expenses are not necessarily
accompanied , at the same, by changes in cash
Changes in cash are not necessarily coupled with
changes in revenue and expenses
Incr/decr in cash = change in an assets account
Revenues and expenses are changes in an equity
account
Lecturer/Facilitator Andre Taitt
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AccrualLecturer/Facilitator
vs cash basis Andre Taitt of Accounting

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Accrual vs Cash Basis Accounting

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The Financial Statements
Income statement
Statement of stockholders
stockholders equity
Balance sheet
Statement of cash flows
Support for the financial statements is
provided by notes

Lecturer/Facilitator Andre Taitt

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