Chap6_2009 - Chapter 6 Financial Statement Analysis...

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Chapter 6 Financial Statement Analysis
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Learning Objectivs After studying Chapter 6, you should be able to: Understand the purpose of basic financial statements and their contents. Explain why financial statement analysis is important to the firm and to outside suppliers of capital. Define, calculate, and categorize (according to liquidity, financial leverage, coverage, activity, and profitability) the major financial ratios and understand what they can tell us about the firm. Define, calculate, and discuss a firm’s operating cycle and cash cycle. Use ratios to analyze a firm's health and then recommend reasonable alternative courses of action to improve the health of the firm. Analyze a firm’s return on investment (i.e., “earning power”) and return on equity using a DuPont approach. Understand the limitations of financial ratio analysis. Use trend analysis, common-size analysis, and index analysis to gain additional insights into a firm's performance.
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• Financial Statements • A Possible Framework for Analysis • Balance Sheet Ratios • Income Statement and Income Statement/Balance Sheet Ratios • Trend Analysis • Common-Size and Index Analysis Topics
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Examples of External Uses of Statement Analysis Trade Creditors -- Focus on the liquidity of the firm. Bondholders -- Focus on the long-term cash flow of the firm. Shareholders -- Focus on the profitability and long-term health of the firm.
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Examples of Internal Uses of Statement Analysis Plan -- Focus on assessing the current financial position and evaluating potential firm opportunities. Control -- Focus on return on investment for various assets and asset efficiency. Understand -- Focus on understanding how suppliers of funds analyze the firm.
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Primary Types of Financial Statements Income Statement A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Balance Sheet A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
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Basket Wonders’ Balance Sheet (Asset Side) a. How the firm stands on a specific date. b. What BW owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear. Cash and C.E. $ 90 Acct. Rec. c 394 Inventories 696 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assets e $1,195 Fixed Assets (@Cost) f 1030 Less: Acc. Depr. g (329) Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223 Total Assets b $2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2007 a
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Basket Wonders’ Balance Sheet (Liability Side) a. Note, Assets = Liabilities + Equity. b. What BW owed and ownership position. c. Owed to suppliers for goods and services.
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This note was uploaded on 07/06/2009 for the course BUS BAM314 taught by Professor Na during the Spring '09 term at 東京大学.

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Chap6_2009 - Chapter 6 Financial Statement Analysis...

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