Financial Statement Analysis
Acct 592
Summer 2003
Background
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Who are we?
Name and contact info.
Education
Professional Certification
Brief work history
Expectations after graduation
Syllabus
Chapter 1
Overview of Financial Reporting
and Financial Statement Analysis
Overview of Financial Statement
Analysis
1. Identify the economic characteristics of the
particular industry
2. Identify the strategies that a particular firm pursues
to gain competitive advantage.
3. Understand the financial statements of the particular
firm and cleanse them of nonrecurring and unusual
items.
4. Assess the profitability and risk of the firm using
information in the financial statements.
5. Value the particular firm.
Identify the Industry Economic
Characteristics
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Value chain analysis:
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Support activities
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Firm infrastructure
Human resources
Technology
Purchasing
Primary activities
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Inbound logistics: Material receiving and storing
Operations: manufacturing
Outbound logistics: distribution order prodcessing
Marketing and sales: advertising and selling
Service: repair maintenance
Identify the Industry Economic
Characteristics – cont.
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Porter’s five forces classification
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Buyer power – elasticity of demand
Supplier power – elasticity of supply
Rivalry among firms – forms of competition
Threat of new entrants – barriers to entry
Threat of substitutes – elasticity of demand
Identify the Industry Economic
Characteristics – cont.
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Economic Attributes Framework
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Demand
Supply
Manufacturing
Marketing
Financing
First Assignment
Due: Start of Class 2
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One page maximum
One inch margins
10 point font
Use Strunk and White for guidance on professional
writing
• Choose a firm for your annual report
• Analyze the firm using Porter’s classification
– See assignments on web site
• Do not plan on a perfect score
Resources
• Library web links
• Lexis/Nexis
• S&P Research Insight
– Carver Hall computer labs
• SEC website (Edgar)
• Corporate website
Software
• Author’s software
• Self-constructed Excel spreadsheets
• Proprietary software
– e.g., E-Trade; MSN; YahooFinance
Identify the company strategy:
Framework for analysis
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Nature of product or service
Degree of integration within the value chain
Degree of geographical diversification
Degree of industry diversification
Financial Statements
• Balance Sheet: measuring financial position
• Income Statement: measuring operating
performance
– Accrual versus cash flow accounting
– Assessing the quality of earnings
• Statement of Cash Flows
– Rationale for statement of cash flows
– Classification
• Statement of Shareholders’ Equity (SRE)
Parties involved in the standard setting
process
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FASB – set standards
SEC – regulatory process
SEC can override FASB
EITF
Learn the sources of financial
information about publicly held firms
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Annual report to shareholders
Form 10-K annual report
Form 10-Q quarterly report
Prospectus or registration statement
Form 20-F annual report
Acronyms: BoD, GAAP, GAAS,MD&A
The Annual Report
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Promotional Information
Letter to Shareholders’
MD&A
Financial Statements and Notes
Auditor’s Report
Management Report and Responsibilities
Company Information
Winnebago Industries
Financial Statements
Basic Financial Analysis
1. Common size financial statements
2. Percentage change financial statements
3. Financial Statement Ratios
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Profitability
Risk (Liquidity and Solvency)
4. Pro forma financial statements
Valuation Ratios
• Price-Earnings Ratio
• Market-to-Book Ratio
Chapter 2
Income Flows versus Cash Flows:
Key Relationships in Understanding
the Dynamics of Business
Net Income and Cash Flows from
Operations
• Methods of calculation
– Direct Method
– Indirect Method
• Articulation of Balance sheet and Income
Statement
• Categories = Firm’s activities
– Operating, Investing, and Financing
Nike Case
• Pages 62&63