6273.ch02.p023-060.Fv1 - Introduction to FINANCIAL...

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Introduction to Financial Statement Analysis Know why the disclosure of financial information through financial statements is critical to investors Understand the function of the balance sheet Use the balance sheet to analyze a firm Understand how the income statement is used Analyze a firm through its income statement, including using the DuPont Identity Interpret a statement of cash flows Know what management’s discussion and analysis and the statement of stockholders equity are Analyze the role of accounting manipulation in the Enron and WorldCom bankruptcies 2 LEARNING OBJECTIVES 23
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University of Texas, Arlington, 2006 “I use financial statement analysis extensively to understand a company’s performance and how it compares to its industry peers.” INTERVIEW WITH Hiral Tolia, CBIZ Valuation Group, LLC As a senior consultant for CBIZ Valuation Group, LLC, in Dallas, Texas, Hiral Tolia works on client projects that focus on determining a company’s value. For example, a privately held company wishing to issue stock to its employees may hire CBIZ to determine its value before setting a stock price. In mergers and acquisitions, a company may need CBIZ to value certain assets owned by the acquired company, as required for financial reporting purposes. Hiral, who received a Bachelor of Engineering in Computer Science in 2003 from the University of Mumbai and an MBA in 2006 from the University of Texas, Arlington, uses the concepts she learned in her various finance classes on a daily basis. “Because we have clients from various industry sectors, we need an in-depth knowledge of each of those market segments. I use financial statement analysis extensively to understand a company’s performance and how it compares to its industry peers.” Analyzing financial statements gives Hiral insight into a company’s current financial position and its performance over time. “This information is useful in making economic decisions, such as to determine a company’s future cash flows, the effect of cyclical trends in the industry on operations over a period of time and in the future, and whether to invest in the company’s securities or recommend them to other investors,” she explains. “Thus, it is important to understand financial statements whether you are an owner of the company, an employee, an investor, or an analyst.” The first step in valuing a company is assessing past performance and determining its current financial position using information contained in the publicly available financial statements. “We use income statements to analyze revenue and expenses and the balance sheets and statement of cash flows to analyze short term cash flow needs and determine capital expenditures.” One of CBIZ’s valuation methods involves the review of pricing and performance information for public companies in a generally similar industry to the subject company. “Ratio analysis helps to compare the subject company to market participants, so we can apply our valuation models and determine a fair value for the company.” 24
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6273.ch02.p023-060.Fv1 - Introduction to FINANCIAL...

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