CFA - Corporate Finance E-book 4 of 7

Corporate Finance E-Book

Part 4 of 7

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CFA - Corporate Finance E-book 4 of 7

Financial Statement Analysis

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1. Performa Analysis.

CFA - Corporate Finance E-book 4 of 7

Performa, a Latin term meaning "as a matter of form," is applied to the process of presenting financial projections for a specific time period in a standardized format. Pro forma statements, as the name implies, are projected financial statements embodying a set of assumptions about a company's future performance and funding requirements. Pro forma balance sheet and income statement are projected assuming: The company will continue to grow at a rate to its most recent past growth rate, and All elements have some relationship with projected sales (e.g. constant percentage of sales). The steps are: 1. Estimate the sales driven relations. 2. Estimate the fixed burdens. 3. Forecast sales. 4. Construct pro forma statements.

Pro forma statements are an integral part of business planning and control. Financial managers use them in the decision-making process when constructing an annual budget, developing long-range plans, and choosing among capital expenditures.

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Subsequent Costs

CFA - Corporate Finance E-book 4 of 7

Subsequent costs are capitalized only if they meet general recognition criteria Future economic benefits are probable Cost can be measured reliably

Costs of day-to-day servicing are expensed as incurred

Recognize cost of replacing part of PPE item when incurred Recognize major inspection cost in the carrying amount as replacement if recognition criteria is met Any remaining carrying amount of cost of previous inspection is derecognized Derecognize replaced parts (physical or otherwise) in accordance with derecognition provisions of the standard

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CFA - Corporate Finance E-book 4 of 7

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