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FINANCIAL STATEMENT ANALYSIS

Dr. Josep Ginting


Economics and Business Faculty
President University
Financial Statement Analysis
and Accounting
• Financial statement analysis is the judgment process that aims
to evaluate the current and past financial positions and the
results of operations of enterprise, with the primary
objectives of determining the best possible estimates and
predictions about future conditions and performance.
• Accounting is the summary of financial activities.
BALANCESHEET

INCOME
ACCOUNTING STATEMENT
SUMMARY CASHFLOW
STATEMENT
THE CHANGES OF
EQUITY
OWNERSHIP
Objective of FSA
(Business Process)
Rivalry Among Existing Firm
Threat of New entrants
 Industry growth
 Scale economies
 Concentration Threat of Substitute Products
 First mover advantage
 Differentiation  Relative price and
 Distribution access
 Switching cost performance
 Relationships
 Scale/Learning economies  Buyers willingness to switch
 Legal barriers
 Fixed Variable cost
 Excess capacity

INDUSTRY
PROFITABILITY

BARGAINING POWER IN INPUT AND OUTPUT MARKETS


Bargaining Power of Buyers Bargaining Power of Suppliers
 Switching cost  Switching cost
 Differentiation  Differentiation
 Important of product for  Important of product for cost
cost and quality and quality
 Number of Buyers  Number of Buyers
 Volume per buyers  Volume per buyers
Objective of FSA
(Business Process)
Differenciation
Cost Leadership
Supply a uniqueproduct or service at a cost
Supply same products or service
lower than the price premium cutomers will
at lower cost
pay
 Economies of scale and scope
 Superior product quality
 Efficient Portfolio
 Superior product variety
 Simpler Product Design
 Superior customer service
 Lower inputs cost
 More flexible delivery
 Low cost Distribution
 Investment in brand image
 Little research and development or
 Investment in research and development
branding advertising
 Control system focus on creativity and
 Tigh cost control sysstem
innovation

Competititve adventage
 Match between firms core competencies and key
success factors to execute strategy
 Match between firms value chain and activities
required to execute strategy
 Substantially of competitive advantage
Objective of FSA
(users of financial data)

• Credit grantors, the techniques of financial statement analysis is used


by lender as well as the criteria of evaluation used by them vary with
term, the security and the purpose of loan.
• Equity investors, the financial data is used to value the company stock
because they own the shares and to analyze the health of company.
• Management, use the financial data to measure the financial target
achievement.
• Acquisition and merger analysis, the value of company stocks is used
by external and internal company to make the same perception about
the price in acquisition process.
• Auditors, use the financial data to see the fairness of financial data
and asset management process.
Major Foundations of Knowledge in FSA

• The first foundation, involves a thorough understanding


of the accounting model as well as the language , the
meaning, the significance, and the limitations of financial
communications, as most commonly reflected in
published statements.
• The second foundation, which inevitably builds on the
first, consist of the mastery of the tools of financial
analysis by means of which the most significant financial
and operating factors and relationships can be identified
and analyzed for purposes of reaching informed
conclusions.
Raw Material of Analysis
• The analytical process that underlie the conclusions of
security analyst, credit analyst and other external analyst, as
well as internal analyst, make use of vast array of facts,
information, and data, economic, social, political and other.
However the most important quantitative data utilized by
these analyst are the financial data that are the output
accounting system.
Limitations of Accounting Data

• Monetary expression, financial statement can only


present information that lends itself to qualification
in terms of the monetary unit.
(financial statements contain very little direct
information about the character, motivation, experience,
or age of the human resources – financial statements do
not contain except in terms of aggregate final results,
information about quality of the research axnd
development effort or the breadth of the marketing
information).
Limitations of Accounting Data

• Use of individual judgment, the use of individual


judgment in the preparation of financial statement is
inevitable => limitation to be recognized here is the
resulting variety in the quality and reliability of
financial statement presentations.
(Financial statements may not be of uniform quality and
reliability because of differences in the character and the
quality of judgment exercised by accountant in their
preparation)
Limitations of Accounting Data

• Simplifications and rigidities inherent in the


accounting framework, the simplification process
is necessary in order to classify the great variety of
economic events into a manageable number of
categories.
(the simplifications and rigidities inherent in the accounting
framework , as well as the high degree of summarization
present in the financial statement make it imperative that the
analyst be able to analyze and to reconstruct the events and
the business transactions that they reflect)
Limitations of Accounting Data

• Interim nature and the need for estimation, a further


limitation of financial statements stems from the need to
report for relatively short periods of the total life span of
enterprises. To be useful, accounting information must be
timely and therefore determinations of financial condition
and result of operations must be made frequently.
(difficult to estimate : amount and timing of cash collection on
receivables, future sales price and sales volume of inventory items, life
and salvage value of fixed assets, future warranty claims, percentage
completion and cost to complete for long term contract, tax expense
and loss reserves)
The Function of Accounting

• To measure the resources held by specific entities.


• To reflect the claims against and the interests in
those entities.
• To measure the changes in those resources, claims,
and interests.
• To assign the changes to a specifiable period of time.
• To express the foregoing in terms of money as a
common denominator.
The accounting cycle
Long Defer
Current
capital term red
liabilities
debt credit

RM/Inv Intangi Deferred


cash A/R PPE
entory ble ass charge

Other
Other
labor materials productio
expenses
Other n cost
income sales

Finished
Good WIP

Net
income COGS COGM