Applying Financial Statement

Analysis
Comprehensive Case
Campbell Soup
Prelude to Comprehensive Analysis
Steps in analyzing financial statement
Building blocks of analysis
Analysis Reporting
Specialization in FSA
Steps in Analyzing Financial Statement
First: Explicitly defining the analysis objectives to
achieve an effective (focused) and efficient analysis
(economy of time and effort) Example: see
illustration CC 1a short term loan decision (3
months)
Second: Formulating specific questions and criteria
consistent with the analysis objectives Example:
see illustration CC 1b can debtor fulfill his obligation
to repay the debt within 3 months
Third: Identifying the most effective and efficient tools
of analysis Example: see illustration CC 1c
liquidity, current assets turn over, A/P turn over, cash
forecasting
Forth: Interpreting the evidence Illustration CC 1d
Building blocks of financial statement
analysis
FSA focuses on once or more elements of
company financial condition or operating
results
Emphasizing six areas of inquiry with varying
degree of variations depend on the
objectives of FSA


Building Blocks of Analysis
Prelude to Comprehensive Analysis
Analysis emphasizes six areas of inquirywith varying degrees of
importance

Short-term liquidity--Ability to meet short-term obligations.
Capital structure and solvency--Ability to generate future
revenues and meet long-term obligations.
Return on invested capital--Ability to provide financial rewards
sufficient to attract and retain financing.
Asset turnover--Asset intensity in generating revenues to
reach a sufficient profitability level.
Operating performance and profitability--Success
at maximizing revenues and minimizing
expenses from operating activities
over the long run.
Forecasting and valuation ability to generate sufficient cash
flows fund investment needs and create shareholder value.
Building blocks of financial statement
analysis Contd
The building blocks are:



Short term liquidity
Capital structure and solvency
Return on invested capital

Assets turnover
Operating performance and
profitability
Forecasting and valuation

Financing activity
Financing activity
Operating&investing&
financing act.
Investing activity
Operating activity

Operating,investing,finan
cing act.

Reporting on Financial St Analysis
Reducing uncertainty through rigorous and
sound evaluation
Help us in identifying weakness in inference
by requiring explanation
Force us in organizing our reasoning and to
verify the flow and logic of analysis
Serve as a communication device
Reinforce judgment and refining inferences
Reporting on Financial St Analysis
Contd
We should prepare a good report which
separates interpretations and conclusions of
analysis from the information underlying them
Good report at least contains 6 sections:
Executive summary
Analysis overview
Evidential matter
Assumptions
Crucial factors
Inferences


Specialization in Financial St Analysis
Each company is having unique characteristics
which is affected by the industry-unique
characteristics
The factors arise from several influences, including
special industry conditions, government regulations,
social concern, and political visibility
Remember, different industry is having different
accounting standard
Therefore in analyzing a company, analyst should
understand the accounting peculiarities and special
factors influences the company