Chapter 12 - Using Financial Statements.docx

Chapter 12 - Using Financial Statements.docx - Chapter 12...

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Chapter 12 – Using Financial Statements Week 12 – December 7, 2015 Why do people use Financial Statements? -people analyze financial statements to make decisions such as lending, purchasing equity, buying/selling a business, pricing and wage issues, obtaining subsidies or grants, etc. -F/S can be used to help project future earnings, evaluate profitability and liquidity, determine compliance with covenants, assess risk, project cash flows, etc. -be aware that each user group has different decisions to make and thus uses and approaches the financial statements differently. -however, need to know that F/S really only provide clues and insights into the F/S and rarely provide definitive answers – just a starting point - need to know and ask many other questions about an entity which are not necessarily found on the F/S (ie. Key success factors, clientele, competitive environment and climate, risks, etc.) -for public companies, one good source of info is the Management Discussion and Analysis (MD&A) in the annual report, which must be prepared by all public companies -prepared by management therefore may be biased -no requirement on what must be said therefore quality varies among companies How can we use F/S to forecast future earnings?
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