CHAPTER 1: OVERVIEW OF FINANCIAL STATEMENT ANALYSIS 🚩 : 
1.2 Financial Statements - Basis of analysis
Business activities
Planning
Operating
Consist of company objectives& tactics, market demands, competitive analysis, sales strategies, managements performance and financial projections.
Methods that companies use to raise the money to pay its employees, market campaigns and RnD.
Sources of financing
Internal financing
1.1 Introduction to Business Analysis
FSA is part of business analysis (BA)
BA is the evaluation of a company's prospects and risks for the purpose of making business decisions.
Improve business decision by evaluating company financial's situation, its management, its plan & its business environment.
Types of Business Analysis
Credit Analysis
Equity Analysis
The evaluation of the creditworthiness of a company
Credit analysis (CA) is the ability of a company to pay its bills to creditors
A company’s primary source of earnings
Creditors can be classified into trade creditors and non trade creditors.
Trade creditor
Non Trade creditor
Provide goods or service.
Provide major financing
It also refers to carrying out the business plan
Mostly short term
5 possible components :
Mostly long term
R&D
Production
Marketing
Procurement
CA includes analysis of both liquidity and solvency.
Administration
Liquidity
Solvency
company's ability to raise cash in the short term to meet its obligation
company's long run viability and ability to pay long-term obligations
to access the upside potential ( uncertain possibility of gain)
to access the downside risk
Use technical analysis or fundamental analysis, or both.
Technical refers to charting & searches for pattern in the price or volume history of stock to predict future price movement.
Fundamental analysis is to determine instrintic value (IV) of company
Instrinsic value is the value of company determine through fundamental analysis without reference to its market value
Component of Business Analysis
Other Uses of Business Analysis
Buy stock when IV > MV. Sell stock when IV < MV
An analysist must forecast a company's earnings/ cashflow to determine IV
Managers
Mergers, acquisitions, and divestitures
Financial management.
Directors
Regulators
Labor unions.
Customers
Business Environment and Strategy Analysis
Industry Analysis
Strategy Analysis
Accounting
Analysis
Financial
Analysis
Profitability
Analysis
Analysis of Cash
Flows
Risk
Analysis
Prospective
Analysis
Cost of
Capital Estimate
Intrinsic Value
External financing
Creditors
(lenders)
Investing
A company's acquisition & maintenance of investments for :
Selling products & providing services
Investing excess cash
Equity investor (shareholders )
Example:
- Earning reinvestment
Two types:
- debt creditors
- operating creditors
Major source
Financing
Financial Statements Reflect Business Activities
Additional information
Company’s acquisition and maintenance of investment for purpose of selling products and providing services, and for the purpose of investing excess cash.
To audit tax returns
To provide clues to strategic changes in operating, investing & financing activities.
To evaluate a competitor’s profitability & risk.
To evaluate relative strengths & weaknesses
To benchmark performance.
To identify targets & determine additional value
To protect shareholders’ interests.
To evaluate the impact of financing decisions, dividend policy, profitability & risk.
To check the reported amounts.
To determine the profitability of suppliers.
To negotiate.
MD&A
Management Report
Auditor Report
Explanatory Notes
Supplementary Information
Proxy Statements
Supplemental schedules to the financial statement notes
Operating assets
Financing assets
- land
- building
- legal right (patents, license)
Financial statement analysis requires a review of the auditor's report to ascertain whether the company received an unqualified opinion.
- equity stock
- gov bonds
- money market funds
Companies with publicly traded debt and equity securities are required by the Securities and Exchange Commission to file a MD&A.
Purposes of this report: 1) senior management's responsibilities for the company's financial and internal control system. 2)the shared roles of management, directors and the auditorin preparing financial statements.
Balance Sheet
Income Statement
Statement of changes in Shareholders’ Equity
Statement of cash flows
The technical nature of notes creates a need for a certain level of accounting knowledge on the part of financial statement analysts.
Contains information necessary for shareholders in voting on matters for which the proxy is solicited.
- Accounting equation(also called the balance sheet identity is the basis of the accounting system
- Assets = Liabilities + Equity
- Measures a company's financial performance over a period of time
- Earnings are determined using the accrual basis of accounting
- Useful identifying reasons for changes in equity holders' claims on the assets of a company
- Contributed capital called as share capital
Report cash inflows and outflows separately for a company’s operating, investing, and financing activities over a period of time
1.3 financial statement analysis preview
Analysis Tools
Common-size financial statement analysis
Ratio analysis
Comparative financial statement analysis
Cash flow analysis
1 year to year change analysis
index number trend analysis
Sources of financing (current liabilities, non-current liabilities & equity)
Composition of assets (current & non current assets)
Net Cash Flows from Operating Activities
Net Cash Flows from Investing Activities
Net Cash Flows from Financing Activities
Areas of Ratio Analysis
Credit (risk) Analysis
Profitability Analysis
Valuation
Liquidity
Capital structure and solvency
Return on investment
Operating performance
Asset utilization