Financial Statements Analyze
Introduction to Financial
Statements Analysis
BBA Degree Programme, Final Year, Semester I
Lecturer in Charge
A L Sarifudeen.
Senior Lecturer in Finance
B.Com (Spl. in Acc and Fin. Mgt) (SEUSL), MBA (WUSL), SEDA
(UK), CTHE (CMB), MAAT (SL) , ACPM (SL)
Department of Accountancy and Finance
South Eastern University of Sri Lanka
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Business Analysis
Evaluate Prospects
Evaluate Risks
Business Decision Makers
Equity investors
Creditors
Managers
Merger and Acquisition Analysts
External Auditors
Directors
Regulators
Employees & Unions
Lawyers
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Information Sources for Business
Analysis
Qualitative
Quantitative
Management discussion & Analysis
Financial Statements
Chairperson’s Letter
Industry Statistics
Press Releases
Economic Indicators
Financial press
Regulatory filings
Vision/Mission Statement
Trade reports
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Web sites
Credit Analysis
Equity Analysis
Management &
Control
Regulation
Labor Negotiations
Types of
Business
Analysis
Director Oversight
External Auditing
Financial
Management
Mergers, Acquisitions
& Divestitures
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Credit Analysis
Trade
Creditors
Non-trade
Creditors
Provide
goods or
services
Bear risk of
default
Provide
major
financing
Bear risk of
default
Most shortterm
Usually
implicit
interest
Most longterm
Usually
explicit
interest
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Credit Analysis
Credit worthiness: Ability to honor credit obligations
(downside risk)
Liquidity
Solvency
Ability to meet shortterm obligations
Focus:
• Current cash flows
• Make up of current
assets and liabilities
• Liquidity of assets
Ability to meet longterm obligations
Focus:
• Long-term profitability
• Capital structure
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Equity Analysis
Assessment of downside risk and upside potential
Technical analysis /
Charting
Fundamental Analysis
Determine Intrinsic value
without reference to
price
• Patterns in price or
volume history of a
stock
• Analyze and interpret
key factors
• Predict future price
movements
– Economy
– Industry
– Company
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Component Processes of
Business Analysis
Business
Environment &
Strategy Analysis
Industry
Analysis
Strategy
Analysis
Financial
Analysis
Accounting
Analysis
Profitability
Analysis
Analysis
of cash
flows
Risk
Analysis
Cost of
Capital Estimate
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Prospective
Analysis
Intrinsic Value
Accounting Analysis
Process to evaluate and adjust financial
statements to better reflect economic reality
Comparability problems — across firms and across time
Manager estimation error
Distortion problems
Earnings management
Accounting Standards
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Accounting
Risk
Financial Analysis
Process to evaluate financial position and
performance using financial statements
Profitability analysis — Evaluate return
on investments
Risk analysis ——— Evaluate riskiness
& creditworthiness
Analysis of —
cash flows
Evaluate source &
deployment of funds
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Common tools
Ratio
analysis
Cash
flow
analysis
Prospective Analysis
Process to forecast future payoffs
Business Environment
& Strategy Analysis
Accounting Analysis
Financial Analysis
Intrinsic Value
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Dynamics of Business Activities
Business Activities
Time
Beginning of period
Investing
Financing
Planning
Operating
Planning
Investing
Financing
End of period
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Business Activities
Pricing
Competition
Market demands
Distribution
Tactics
Planning
Activities:
Goals
& Objectives
Promotion
Projections
Managerial performance
Opportunities
Obstacles
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The accounting cycle
The accounting cycle is the name given to the collective
process of recording and processing the accounting
events of a company. The series of steps begin when a
transaction occurs and end with its inclusion in the
financial statements.
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During the Accounting Period
Source
Documents
Transaction
Analysis
Record in
Journal
Post to
Ledger
At the End of the Accounting Period
Financial
Statements
Adjusted
Trial Balance
Record & Post
Adjusting
Entries
At the End
of the Year
Close Temporary
Accounts
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Post-Closing
Trial Balance
Unadjusted
Trial Balance
The
Accounting
Processing
Cycle