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Unformatted text preview: CHAPTER TWO Introduction to the Financial Statements Stephen H. Penman The web page for Chapter Two runs under the following headings: What this Chapter is Doing Linking to Financial Statements: the SEC EDGAR Database Linking to the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) Linking to Other Financial Information SEC Reporting Requirements Regulation FD Dells Full Financial Statements and Other Information on Dell Financial Reports in Countries other than the U.S. Accounting Relations: How They Help in Building Analysis Tools A Balance Sheet Presentation that Emphasizes the Shareholders View of the Firm: Dell Computer Book Values and Earnings: the Starting Points for P/B and P/E Valuation Historical P/B and P/E Ratios More P/E and P/B Graphs Multiple screeners Financial Reporting During the Stock Market Bubble of the 1990s Readers Corner What this Chapter is Doing Chapter 2 does two things. First, it familiarizes you with the financial statements, both the form in which the statements are prepared and the measurement rules behind the numbers. Much of the material should be familiar from earlier accounting courses, but it is presented with valuation in mind. When you come to analyze financial statements (in Part II) and prepare financial statement spreadsheets (using the BYOAP feature on the web site), you must have this chapter as background. The material on cash accounting and accrual accounting (and cash flow valuation versus accrual valuation) in Chapter 4 builds from this chapter. Second, the chapter gives you an introduction to intrinsic price-to-book ratios (P/B) and price-earnings ratios (P/E). You see here how these ratios are determined by how book values and earnings are measured. Your understanding of these ratios and how they are estimated will be completed in Chapters 5 and 6. If you have had an accounting course, the material on financial statements serves as a review. But make sure you understand the accounting relations that dictate the form of the statements, for these will be used in constructing analysis tools later. Spend some time on learning how to access financial information through the links on the books web page (see below). Linking to Financial Statements: the SEC EDGAR Database Go to the Web Links in the Student Edition of the web site (under Course-wide Content). The set of links, SEC Filings and Annual Reports, gets you through to the EDGAR files at the U.S. Securities and Exchange Commission (the SEC), at http://www.sec.gov/edgarhp.htm. All firms traded on U.S. stock exchanges must file reports with the Commission, and EDGAR is the database houses all electronic filings since 1993. EDGAR stands for Electronic Data Gathering, Analysis and Retrieval....
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- Spring '10