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Session 2

Introduction to Financial Statement Analysis

Chapter Outline
2.1 2.2 2.3 2.4 2.5 2.6 The Disclosure of Financial Information The Balance Sheet The Income Statement The Statement of Cash Flows Other Financial Statement Information Accounting Manipulation

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2.1 The Disclosure of Financial Information


! Preparation of Financial Statements ! International Financial Reporting Standards ! Types of Financial Statements

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2.2 The Balance Sheet


! Assets
! Curret Assets ! Long-Term Assets

! Liabilities
! Current Liabilities ! Long-term Liabilities

! Stockholders Equity ! Balance Sheet Analysis


! ! ! ! Market-to-Book Ratio Debt-Equity Ratio Enterprise Value Other Balance Sheet Information
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Equation 2.1 The Balance Sheet Identity

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Table 2.1 Global Conglomerate Corporation Balance Sheet for 2005 and 2004

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Example 2.1 Market Versus Book Value

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Example 2.1 Market Versus Book Value

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Equation 2.2

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Equation 2.3

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Equation 2.4

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Example 2.2 Computing Enterprise Value

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Example 2.2 Computing Enterprise Value

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2.3 The Income Statement


! Earnings Calculations
! ! ! ! ! ! ! ! ! ! Gross Profit Operating Expenses Earnings Before Interest and Taxes Pretax and Net Income Profitability Ratios Working Capital Days EBITDA Leverage Ratios Investment Returns Valuation Ratios

! Income Statement Analysis

! Common Mistake: Mismatched Ratios


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Table 2.2 Global Conglomerate Corporation Income Statement Sheet for 2005 and 2004

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Equation 2.5

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Equation 2.6

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Equation 2.7

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Equation 2.8

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Equation 2.9

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Equation 2.10

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Example 2.3 Computing Profitability and Valuation Ratios

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Example 2.3 Computing Profitability and Valuation Ratios

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2.4 The Statement of Cash Flows


! Operating Activity ! Investment Activity ! Financing Activity

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Table 2.3 Global Conglomerate Corporation Statement of Cash Flows for 2005 and 2004

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Equation 2.11

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Example 2.4 The Impact of Depre ciation on Cash Flow

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Example 2.4 The Impact of Depreciation on Cash Flow

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2.5 Other Financial Statement Information

! Management Discussion and Analysis ! Statement of Stockholders Equity ! Notes to the Financial Statements

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Example 2.5 Sales by Product Category

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Example 2.5 Sales by Product Category

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2.6 Accounting Manipulation


! Enron ! WorldCom ! Sarbanes-Oxley Act

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