Financial Statements Analysis Activity
Objective: Key objectives of this activity include enhancement of the following abilities:
A. assess and evaluate information provided in financial statements;
B. assess, evaluate and discriminate among financial ratios available to evaluate financial
statements with respect to the situation at hand;
C. formulate relevant parameters and questions in a relatively unstructured situation;
D. enhance creative and critical thinking skills by developing a checklist of important issues
(variables) to consider when evaluating financial health;
E. apply small group communication skills (listening, consensus, and written/oral
articulation) through the synthesis of ideas and selection of key issues to include in the
group’s report.
Activity: Your small group has been tasked with developing a credit analysis system to be
used by your sales teams, as well as your accounts receivable team. The key objectives of
your credit analysis system are to determine:
1. whether credit should be extended at all;
2. approximately how much credit should be extended;
3. whether the credit account would be characterized as high, average, or low risk.
Deliverables/Outputs: Your team must prepare a written report and may be selected for a
presentation to the sales teams and accounts receivable team. Your report must achieve a few
minimum objectives, such as:
1. Characterization of the issue: What factors are necessary to frame the situation so that
your discussions and analysis are applicable and relevant? In other words, does one
credit analysis system work for all types of firms and industries? If not, your team must
decide how you wish to characterize your relevant firm/industry.
2. Analysis Checklists:
a. Ratios: What ratios are relevant?
b. Other relevant factors, both qualitative and quantitative: What other factors are
relevant to this analysis?
c. Input availability: What inputs are necessary to complete your analysis? How
are these inputs accessible? Are there validity concerns?
3. Your team may include and address any other issues deemed relevant to the analysis.
Solution Ideas: The following lists address various issues that should likely be considered in
this analysis.
1. Size of credit request: How big is the credit request relative to:
a. our firm extending credit
b. the firm requesting credit.
2. How can you evaluate size? Perhaps relative to the following:
a. Sales
b. Accounts receivable: total, largest, average accounts within
3. Validity of data inputs:
a. Market value versus book values
b. Audited versus unaudited information
4. Ratios:
a. Debtor’s Ratios (requesting credit): Current, Quick, Inventory turnover (days sales in
inventory),
b. Your Ratios: Current, Quick, AR turnover (yours)
5. Current AR conditions: Is your firm currently experience AR & cash flow problems?
6. Strategic significance of account: How critical is this account to your future? Are there
synergies (future opportunities) associated with this credit sale?
MBA 621 COURSE OBJECTIVES:
Upon successful completion of this course, the student should be able to:
a) articulate, illustrate, and apply fundamental financial concepts from an introductory finance
course that are reviewed in this course,
b) read, understand, and articulate the messages in graphs and figures appropriately,
regardless of the prior familiarity level associated with the relevant concept; and efficiently,
effectively, and appropriately utilize graphs and figures for improving your communication of
business concepts and issues,
c) articulate the goal of the corporation, as well as the implications of this goal and why it is
an appropriate goal, and the role of ethical decision making in relationship to the financial
goal,
d) articulate and illustrate fundamental issues regarding agency problems,
e) articulate, demonstrate and apply fundamental financial statement analysis procedures,
be able to articulate and demonstrate subtle warnings and pitfalls regarding financial
statements, and be able to prepare a financial statement analysis report,
f)
articulate, demonstrate, apply and compute the difference between net income (profits)
versus cash flow,
g) given appropriate data, be able to determine and manipulate basic tax considerations,
particularly as related to the advantages associated with depreciation and the use of debt
in the firm's capital structure,
h) articulate and demonstrate the core components and implications of interest rates,
including the term structure of interest rates and the concept of a yield curve,
i)
articulate and illustrate the role individual shareholder preferences have in the capital
budgeting decision making process for corporate managers, and relate this to the
fundamental financial goal of corporations; in other words: why the net present value rule is
an appropriate capital budgeting decision rule despite the diversity of personal preferences
among the multitude of corporate stockholders (i.e., articulate and illustrate the Fisher
Separation concept of investment and consumption),
j)
given the appropriate data, be able to manipulate and analyze time value of money
scenarios, including growing perpetuities and geometric progressions associated with finite
cash flow streams
k) articulate and demonstrate fundamental issues and nuances associated with the valuation
of financial securities, including stocks, bonds, and derivatives
l)
articulate, demonstrate and apply fundamental concepts associated with capital budgeting
processes, including decision rules (particularly NPV vs IRR), appropriate cash flow
determination, and completion of the analysis
m) articulate, apply, and demonstrate fundamental portfolio implications and applications;
including fundamental risk analysis methods, particularly the relevant risk and return for a
portfolio and the efficient frontier in Markowitz’ portfolio theory,
n) articulate, demonstrate, and assess the significance of fundamental issues relevant to
various sources of corporate financing, particularly the issues relevant to the decision to
utilize debt in the corporate capital structure, including the Miller and Modigliani’s model,
o) articulate, demonstrate and apply fundamental issues relevant to dividend policies,
p) articulate, demonstrate and apply fundamental signaling concepts and asymmetrical
information concepts as they apply to dividend policies, capital structure, and general
corporate strategies,
q) articulate an understanding of the fundamental parties and issues regarding financial
markets, particularly implications of efficient market principles, the role of arbitrage
opportunities, as well as electronic commerce implications, in driving market efficiencies,
r) articulate and demonstrate a fundamental understanding of contemporary financial
literature and popular press publications such as the Wall Street Journal.