describe the roles of financial reporting and financial statement analysis;

describe the roles of the key financial statements (statement of financial position,
statement of comprehensive income, statement of changes in equity, and
statement of cash flows) in evaluating a companys performance and financial
position;
describe the importance of financial statement notes and supplementary
information including disclosures of accounting policies, methods, and estimates
and managements commentary;
describe the objective of audits of financial statements, the types of audit reports,
and the importance of effective internal controls;
identify and explain information sources that analysts use in financial statement
analysis besides annual financial statements and supplementary information;
describe the steps in the financial statement analysis framework.
evaluate a companys past financial performance and explain how a companys
strategy is reflected in past financial performance;
prepare a basic projection of a companys future net income and cash flow;
describe the role of financial statement analysis in assessing the credit quality
of a potential debt investment;
describe the use of financial statement analysis in screening for potential equity
investments;
determine and justify appropriate analyst adjustments to a companys financial
statements to facilitate comparison with another company
Role of Financial Reporting
Provide information about
Performances
Financial Position
Changes in Financial Position
Role of Financial Statement Analysis
Use financial reports combined with other information to
evaluate
past,
current and
potential
performances and financial position of a company for the
purpose of making
Investment
Credit and
Other economic decisions
Concern about the factors that affect the risks to a companys
future performances and financial position
Evaluation an equity investment
Evaluation a merger or acquisition
Evaluation a subsidiary or operating division
Determining the creditworthiness of a company
Extending credit to a customer
Assigning debt rating to a customer
Forecasting future net income and cash flows
Economic
Industrial
Company
Peers
Financial Statements and Supplementary Information
Statement of Financial Position
Statement of Comprehensive Income
Income statement
Other Comprehensive income
Statement of Changes in Equity
Cash flow Statement
Financial Notes and supplementary Schedule
Financial Instruments and associated risks
Commitments and contingencies
Legal proceedings
Related party transactions
Subsequent events
Business acquisitions and disposals
Segmental reporting
Management Discussion and Analysis
Auditors Report
Other sources of information
Proxy statements
Interim Reports
Web sites
Press releases
Forums and conferences
Perodicals
Articulate the purpose and context of Analysis
Collect Input Data
Process Data
Analyzed or interprets the processed data
Develop and communicate conclusions and recommendations
Follow-up
A common size financial statement is a standardized version
of a financial statement in which all entries are presented in
percentages.
A common size financial statement helps to compare entries
in a firms financial statements, even if the firms are not of
equal size.
How to prepare a common size financial statement?
For a common size income statement, divide each entry in the
income statement by the companys sales.
For a common size balance sheet, divide each entry in the balance
sheet by the firms total assets.
FIN3000, Liuren Wu 11
Comparability
Trend
Cross sectional
What happenedWhy
Performances help Road map
Benchmark
Why?
Expected value of a Company
Credit Analysis
Sources of Projection
Company Projections; Relative Valuation, Sensitivity
Company previous FS; acquisition, Start up, volatile industry?
Industry Structure & Outlook
Macro Economic Forecasts
An input to Market based Valuation
Top-down approach
Industry
Company
Common Size
Operational Expenses
Margins
Non recurring Nature