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im-14-4e - CHAPTER FOURTEEN FINANCIAL STATEMENT ANALYSIS...

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CHAPTER FOURTEEN FINANCIAL STATEMENT ANALYSIS CHAPTER OVERVIEW This chapter discusses the basic financial statements, the differences between accounting and economic income, return on equity (ROE), the decomposition of the ROE into component ratios for the purpose of financial analysis, other ratios relevant for financial analysis, and financial statement comparability problems. LEARNING OBJECTIVES After studying this chapter, the student should be able to analyze a firm using the basic financial statements to perform ratio analysis. The student should be able to identify the source of problems over time by decomposing the ROE using the Du Pont procedure. The student should also be able to identify comparability problems across firms due to the varying generally accepted accounting principles available to the firm. PRESENTATION OF CHAPTER MATERIAL 1. Overview of Financial Statement Analysis The purpose of performing financial statement analysis is to use the firm’s accounting data in the security valuation process. An analyst can use the actual financial statements or use financial ratios constructed from the financial statements. Financial statement analysis can often lead the analyst to examine certain factors but it rarely gives the analyst a complete answer. T 14-2 Overview A description of the basic financial statements is presented in T 14-3. Analysts use common sized statements to make comparisons between firms. Indexed or trend statements are used to analyze changes over time. The statement of cash flow is used to identify where a firm got its funds and how the firm used the funds over the statement period.
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