Looking internally we review a companys strengths and

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WOT analysis has two parts. Looking internally, we review a company's Strengths and Weak- nesses.while for external purposes we review the Opportunities of and Threats to the company. WOT analysis then tries to understand particular Strengths and Weaknesses that give rise to spe- cific Opportunities (to exploit the Strengths) and Threats (caused by the Weaknesses). When used as part of an overall strategic analysis, SWOT can provide a good review of strategic options. However, SWOT is sometimes criticized as too subjective. Two individuals can identify entirely different factors from a SWOT analysis of the same company. This is partly because SWOT is intuitive and allows varying opinions on the relevant factors.
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1-19 Module 1 I Framework for Analysis and Valuation In sum, we must assess the broader business context in which a company operates as we read and interpret its financial statements. A review of financial statements, which reflect busi- ness activities, cannot be undertaken in a vacuum. It is contextual and can only be effectively undertaken within the framework of a thorough understanding of the broader forces that impact company performance. We should view the above questions as a sneak preview of the types we will ask and answer throughout this book when we read and interpret financial statements for purposes of forecasting and valuation. MID-MODULE REVIEW The following financial information is from Allstate Corporation, a competitor of Berkshire Hathaway'S GEICO Insurance, for the year ended December 31,2010 ($ millions). $ 562 3,689 31,400 19,044 (6,071) 111,830 30,427 130,312 2,332 928 612 Cash, ending year . Cash flows from operations . Revenues . Stockholders' equity ............ •. Cash flows from financing . Total liabilities . Expenses . Noncash assets . Cash flows from investing . Net income . Cash, beginning year . Required 1. Prepareanincomestatement,balancesheet,andstatementofcashflowsforAllstateatDecember 31,2010. 2. Compare the balance sheet and income statement of Allstate to those of Berkshire Hatha- way in Exhibits 1.3 and 1.4. What differences do we observe? The solution is on page 1-42. STEP 2-ADJUSTING AND ASSESSING FINANCIAL INFORMATION Choices in Financial Reporting Some people mistakenly assume that financial accounting is an exact discipline-that is, com- panies select the one proper accounting method to account for a transaction, and then follow the rules. The reality is that GAAP allows companies choices in preparing financial statements. The choice of methods often yields financial statements that are markedly different from one another in terms of reported income, assets, liabilities, and equity amounts. People often are surprised that financial statements comprise numerous estimates. For exam- ple, companies must estimate the amounts that will eventually be collected from customers, the length of time that buildings and equipment will be productive, the value impairments of assets, the future costs of warranty claims, and the eventual payouts on pension plans. Following are examples of how some managers are alleged to have abused the latitude available in reporting financial results.
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