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Chapter 10 - PART FOUR 4 Financial Accounting Analysis...

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Financial Accounting Analysis Wrap-Up Chapter 10 provides analysis relevant to preparing and using finan- cial accounting information: financial statement analysis (focusing on the illustrative case of Canadian Pacific Railway Limited, made familiar by various examples in earlier chapters and so brought together in this chapter), “present value” analysis of the time value of money, and “what if” or “effects” analysis used to help managers understand the effects of accounting changes or various financial and other business deals. C10 Financial Accounting Analysis Wrap-Up PART FOUR 4 NEL
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CHAPTER TEN 10 Chapter Introduction: Analysis of Financial Accounting Information Financial Accounting Analysis Wrap-Up NEL Lydia and Serge are successful professionals: Lydia is in architec- ture and Serge is in engineering. They are beginning to accumu- late significant savings and have started to think about building an investment portfolio. In preparation for a meeting with an investment advisor, they are talking over cups of frothy coffee at a local muffin and doughnut shop. Lydia: “I believe in business fundamentals. A company that performs well should be appreciated by the stock market in the long run. In my practice, I certainly see some client companies that seem to be well-run and others that don’t seem to have it together. But those are impressions from meeting the clients’ people and seeing their offices. I’d like to do a more rigorous evaluation than that.” Serge: “Remember when we were deciding to buy a house? We worried about whether we were taking on an appropriate debt load, and if we were getting enough benefit out of our savings by transferring them into the house down payment. We had to balance the loss of investment income from our savings and the new cost of mortgage interest against the benefits of being house- owners. Companies have to do the same sort of calculations: we need to see how they do that and if they do it well.” Lydia: “We’ve both talked about companies doing things well. I’m more than a little spooked by all the upset in stock markets and companies’ accounting, and am not sure how to tell who really is doing well. Look at this newspaper: one article claims that cash flow is the best measure of performance, and beside it is an article talking about net income as a good prediction of future performance, and at the bottom of the page there is an analysis of future cash flows discounted to the present to show the invest- ment value of those cash flows. There seem to be many versions of what ‘doing well’ means.” TO THE READER: This chapter is written to be used flexibly. Its three parts (Sections 10.2–10.6, Section 10.7, and Sections 10.8–10.9) may be studied in any order, any time after Chapter 4 is covered.
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