AC 101 Fall 2007 Ch 6

AC 101 Fall 2007 Ch 6 - Financial Statement Analysis...

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Financial Statement Analysis Chapter Six Prepared by: Sarita Sheth Santa Monica College
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Chapter Six Objectives 1. Recognize the need to adjust financial statements to give effect to differences in accounting methods and understand how to make basic adjustments. 2. Calculate and interpret common financial ratios. 3. Evaluate a firm’s short-term and long-term debt repayment abilities and its profitability. 4. Have a basic understanding of methods of forecasting future revenues or earnings. 5. Understand the concept of present value and is application to valuing free cash flows and residual earnings.
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Overview Financial statement analysis refers to a set of procedures that transforms data from financial statements into information that can be used for future decision making.
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Types of Comparisons 1. Inter-temporal analysis identifies trends and highlights areas for concern. 2. Cross-sectional analysis involves comparing the subject to its competitors.
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Comparison Issues 1. Problem: Sizes of companies may vary. Example: Comparing Taco Bell (sales in 2003 of $1.3 billion) with Taco Bueno (sales in 2003 of $108 million) Solution: Analysts compares using financial ratios. 1. Problem: Accounting policies may vary from company to company. Example: One company uses accelerated depreciation, while the other does not. Solution: Analyst performs analysis “as if” the statements were prepared with the same procedures.
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Operating Forecasts Using the comparison & trend analysis; analysts must forecast future prospects. Forecasting Factors: Industry outlook Economic outlook Company’s business plan Competition
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Financial Statement Analysis Steps 1. Review financial statements. 2.
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AC 101 Fall 2007 Ch 6 - Financial Statement Analysis...

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