Section__9A____SP__09_Fin_St - Section #9A Survival...

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Section #9A Survival Financial Statement Analysis March 24th, 2009 Copyright 2009 by Rich Curtis The New York Stock Exchange
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A. Who needs to analyze financial statements and why? Lenders, rating agencies, regulators, stockholders and potential stockholders, suppliers, employees and potential employees, customers (in some cases), and obviously management.
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B. Financial Statements Overview Financial Statements give a picture of: 1. An organization’s profitability over some time period (i.e. the Income Statement) 2. An organization’s assets , liabilities , and net worth at a given point in time (i.e. the Balance Sheet). 3. The organization’s cash position at a given point in time (i.e. the Statement of Cash Flows)
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Firms keep at least 2 or 3 sets of books … 1. For shareholders 2. For the IRS 3. For internal decision-making Accounting Policies overseen and GAAP set by: Congress SEC FASB
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C. Financial Statement Comparisons 1. Trends over time a. Versus previous quarter b. Versus same quarter last year 2. Raw Numbers versus Competitors
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Analysis can be facilitated by not only looking at raw dollar amounts, but by looking at items as a % of sales. In both cases (raw $’s and % of sales) check if there are material changes from year to year. In addition, compare % amounts to those of your competitors. 3. Common Size Statements (time trend & versus competitors)
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Sales 100% - Cost of Goods Sold 76% Gross Profit 24% The cost of goods sold and gross profit as a % of sales can be important numbers to know, especially if they change over time. COGS % ~ 55.5% for jewelry retailers ~ 76.0% for grocery retailers a. Example As the $ amount of sales increases, what factor might be expected to decrease the % COGS?
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What might be implied if accounts receivable increases as a percentage of sales? What might be implied if the allowance for doubtful accounts increases as a percent of accounts receivable? Overly generous credit terms … Selling to poor credit risks … b. Example : c. Example :
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What if inventories increase over time as a percentage of sales? It’s likely that there’s poor inventory management and that changes could free up capital tied up in inventory. d. Example :
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D. Performance Questions 3. Are we making money? What’s driving our profitability? Are we well-managed? 4. Are we growing? What’s the source of that growth? 5. Are we generating cash? 6. Is our common stock a good value for potential investors? 1. What’s our current financial position? Will we be around in 12 months? 2. Do we have prudent amounts of debt financing? Investment Safety Management Effectiveness Valuation
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1. Are our assets growing? Why? What is the source of financing of those assets? Are we vulnerable because of excessive debt financing?
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This note was uploaded on 09/03/2009 for the course AEM 3240 taught by Professor Curtis,r. during the Spring '07 term at Cornell University (Engineering School).

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Section__9A____SP__09_Fin_St - Section #9A Survival...

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