Intro to Financial Statement Analysis

Intro to Financial Statement Analysis - Introduction to...

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1 Introduction to Financial Statement Analysis Individuals Firm Make Decisions Financial Statement Analysis is a process that culminates in an estimate of firm value. Firm Value Information Firm Value and Stock Price b Are not necessarily equal. b Stock price is observable but firm value must be estimated. b Valuation models estimate value by calculating the present value of future payoffs b Comparing estimated firm value with stock price is the basis for the analyst’s buy/sell/hold recommendations b In Spring 2009, an analyst set a target price of $0 for GM stock
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2 Financial Statement Analysis -Six- Step Process 1. Identify the industry’s economic characteristics 2. Identify company strategy 3. Assess financial statement quality—adjust if necessary 4. Analyze risk 5. Analyze profitability 6. Value the firm Our focus is on the first five steps. Financial Accounting provides valuable information used in this process What is Financial Accounting? Investors Financial Accountant Corporations Communicate Measure Stock Selection
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3 Why is financial accounting important? b Which is the better investment– X or Y? b Financial accounting is a key input into the decision process. b However, the information must be reliable b Without reliable information, our capital markets function less efficiently (e.g. Enron). $ $ ? X Corporation Y Corporation Free Market Capitalism and Financial Accounting b Under capitalism, individual property rights make individuals compete for the highest return on their investment. b Financial accounting involves measuring the results of a company’s economic activity and communicating information about the company’s profit so that investors can make informed decisions. b Resources will migrate to businesses by efficiently providing goods and services that people want, i.e. are profitable. b In general, profitable companies raise the standard of living and enhance social welfare b Free market capitalism has made the US the most prosperous country in the world and the most influential country in history. b It follows that the most important subject you will ever study is financial accounting .
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4 How do accountants measure? b Financial accountants follow rules called Generally Accepted Accounting Principles or GAAP b Record business transactions – but not all economic activity is recorded (e.g. order inventory, hire employees)
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Intro to Financial Statement Analysis - Introduction to...

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