Chapter 6 The Analysis of Financial Statements

Chapter 6 The Analysis of Financial Statements - Chapter 6:...

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Chapter 6: The Analysis of Financial Statements Sunday, February 26, 2012 2:42 PM 1. A creditor is ultimately concerned with the ability of an existing or prospective borrower to make interest and principal payments on borrowed funds 2. An investor attempts to arrive at an estimation of a company's future earnings stream in order to attach a value to the securities being considered for purchase or liquidation 1. Sources of information 1.a. Proxy statement: contains useful information about the board of directors, director and executive compensation, option grants, audit-related matters, related party transactions, and proposals to be voted on by shareholders 1.a. Auditor's report: contains the expression of opinion as to the fairness of the financial statement presentation 1.b. Management discussion and analysis: management presents a detailed coverage of the firm's liquidity, capital resources, and operations 1.c. Supplementary schedules 1.d. Form 10-K and Form 10-Q 1.e. Other sources 1. Tools and techniques 1.a. Common size financial statements 1.b. Financial ratios 1.a.i. Liquidity ratios-measure a firm's ability to meet cash needs as they arise 1.a.i.1. Current ratio=current assets/current liabilities 1.a.i.1.a. Measure of short-run solvency, the ability of a firm to meet its debt requirements as they come due 1.a.i.1. Quick or acid-test ratio 1.a.i.1.a. (Current assets-Inventory)/current liabilities 1.a.i.1.b. Eliminates inventory, considered the least liquid CA and the most likely source of losses 1.a.i.1. Cash flow liquidity ratio 1.a.i.1.a. (cash+marketable securities+cash flow from operating
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This note was uploaded on 03/05/2012 for the course BUSI 407 taught by Professor Bowen during the Spring '11 term at UNC.

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Chapter 6 The Analysis of Financial Statements - Chapter 6:...

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