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two - Introduction to Corporate Financial Analysis...

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Introduction to Corporate Financial Analysis Introduction to Corporate Financial Analysis by George W. Blazenko All Rights Reserved © 2008 Chapter 2 Financial Statements in Financial Analysis “There's no business like show business, but there are several businesses like accounting.” – David Letterman “The average parent may, for example, plant an artist or fertilize a ballet dancer and end up with a certified public accountant.” Ellen Goodman (b. 1941), U.S. journalist. “Goodman’s Victory Garden,” Close to Home, Simon & Schuster (1979). 41
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Financial Statements in Financial Analysis Chapter Two Contents (2.1) 44 (2.2) 46 2.2.1 47 (2.3) 48 2.3.1 50 2.3.2 50 2.3.3 51 2.3.4 52 2.3.5 53 (2.4) 53 2.4.1 54 (2.5) 56 2.5.1 56 2.5.2 57 2.5.3 59 2.5.4 63 (2.6) 65 2.6.1 65 (2.7) 67 (2.8) 68 2.8.1 68 2.8.2 70 (2.9) 71 2.9.1 72 2.9.2 74 2.9.3 75 2.9.4 75 (2.10) 77 (2.11) 79 42
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Introduction to Corporate Financial Analysis (2.12) (Within Embedded Icon Below) ........................................................................... 80 DEFINITIONS 80 (2.13) 82 EBITDA 92 EBITDA 93 EBITDA 94 EBITDA 95 EBITDA 95 EBITDA 96 EBITDA 97 EBITDA 98 EBITDA 98 (2.11) 103 OPERATING DEFINITION of FCF .............................................................................. 112 FINANCIAL DEFINITION OF FCF ............................................................................. 112 (2.15) 119 43
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Financial Statements in Financial Analysis (2.1) Financial accounting is the process of producing and disseminating information about the economic activities of a firm. Accountants prepare annual and quarterly reports, and more specifically, financial statements, to transmit this information to interested readers. Many different decision-makers groups require information from financial statements. These groups include shareholders, creditors, employees, suppliers, government, and social interest groups. Financial statements are general summaries of economic activity because user groups have diverse interests. Perhaps because of this diversity, accountants take pains to ensure accuracy of the information presented in financial statements but they provide no guidance on their use. One goal of this book is to explain how investors use financial statement information to analyze business investments. For at least two reasons, communication is weaker between professional accountants and the users of financial statements than between other professionals and the users of their services. First, accounting principles and the pronouncements of regulatory agencies tightly constrain the content and format of statements issued for corporations and especially for publicly traded firms. Second, not only do users of financial statements have little opportunity to make direct requests of accountants for individual treatment, but also the users of financial statements must share one set of statements, in spite of diverse interests. Since the relation is weak between users of financial statement and producers of financial statement, a second goal of this book is to provide a framework for those who prepare financial statement to assess the informational requirements of investors. In this chapter, we integrate ratio calculations into a discussion of financial statements. This integration highlights the use of financial statements in financial analysis. The perspective developed in this chapter has its origins in the financial industry.
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