Financial statements serve many objectives management

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Financial statements serve many objectives. Management uses financial statements to raise financing for the company, to meet disclosure requirements, and to serve as a benchmark for executive bonuses. Investors and analysts use financial statements to help decide whether to buy or sell stock. Creditors and rating agencies use financial statements to help decide on the creditworthiness of a company's debt and lending terms. Regulatory agencies use financial statements to enact social and economic policies and to monitor compliance with laws. Legal institutions use financial statements to assess fines and reparations in litigation. Various other decision makers rely on financial statements for purposes ranging from determining demands in labor union negotiations to assessing damages for environmental abuses. Valuation is the process of drawing on the results of financial statement analysis to esti- mate a company's worth (enterprise value). A company's worth can be viewed as a collection of assets, and those assets have claims on them. Owner claims are reflected in equity shares (securities) of a company. Nonowner claims are reflected in obligations and debt shares (securi- ties) of the company. The valuation process seeks to assess the worth of equity shares or debt shares, or both. 1-3
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Module 1 I Framework for Analysis and Valuation 1-4 Financial statement analysis and valuation is the joint process of scrutinizing a company's cial statements and valuing its equity and debt. The relations between the company (its ts) and the market claims on the company are depicted here: Value of the Company Claims on the Company Market t ~ . s';:" Owner ~ . Claims ---= + Shareholders (equity market) Nonowner Claims Creditors (debt market) t -3 ee that company value equals owner and nonowner claims, where those claims are valued the equity and debt markets. This book provides a framework and several tools to help us analyze companies and value ir securities. To this end, it is helpful to imagine yourself as a specific user of financial state- rs. For example, imagine you are a stock investor- how do you identify a stock to buy or ther to sell a stock you own? Imagine you are a bond trader-how do you identify a bond acquire or whether to dispose of a bond you own? Imagine you are a manager-how do you - "de whether to acquire another company or divest of a current division? Imagine you are an iry or credit analyst- how do you assess and communicate an investment appraisal or credit - report? This focused perspective will enhance your learning process and makes it relevant. This module begins with an overview of the demand for and supply of accounting infor- "on. We then review financial statements and explain what they convey about a company.
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