How to conduct a financial statement analysis

1. How to conduct a Financial Statement Analysis • www.HelpWithAssignment.com

2. Financial Statements • Financial Statements are company-issued accounting reports with past performance information that a firm issues periodically (usually quarterly and annually). • Companies in the US are required to file their financial statements with the Securities and Exchange Commission (SEC) on a quarterly and annually basis. • www.HelpWithAssignment.com

3. Financial Statements • The information in the annual report must also be sent to the shareholders every year. • Financial statements are important tools through which investors, financial analysts and other interested parties like the creditors obtain information about a corporation. • www.HelpWithAssignment.com

4. Types of Financial Statements • Financial Statements are also useful for managers within the firm as a source of information for corporate financial decisions. • Every public company is required to produce four financial statements: • The Balance Sheet, • The Income Statement, • The Statement of Cash Flows and • The Statement of Stockholders’ Equity. • www.HelpWithAssignment.com

5. Balance Sheet • A balance sheet of a company lists the firm’s assets and liabilities. • It provides a snapshot of the firm’s financial position at a given point of time. • The balance sheet includes the assets, the liabilities and the shareholders’ equity. • www.HelpWithAssignment.com

6. Assets in a Balance Sheet • The assets of a company include the long term assets, current assets and expenses to be written off. • Long term assets include land, buildings, equipment, goodwill, patents, trademarks, etc. • Current assets include cash, accounts receivable, inventories, prepaid expenses, etc. • www.HelpWithAssignment.com

7. Liabilities in a Balance sheet • The liabilities of a company include long term liabilities, current liabilities and share holders’ equity. • Long term liabilities include long term debt, capital lease obligations, deferred taxes and other long term liabilities. • Current liabilities include accounts payable, notes payable, current maturities of long term debt. • www.HelpWithAssignment.com

8. Shareholders’ Equity • The sum of current liabilities and long term liabilities is total liabilities. • The difference between the firm’s assets and total liabilities is the shareholders’ equity. • It is also called the book value of equity. It represents the net worth of the company. • www.HelpWithAssignment.com

9. Difference Market value and Book value • In the real world, this is a difficult proposition as the firm’s market value of the asset and liabilities differ from their book value. • The assets of the company are based on their historical cost rather than on their market value. • Same is the case with liabilities also. • www.HelpWithAssignment.com

10. Market value and Book value contd • For these reasons the book value of equity is an inaccurate assessment of the actual value of the firm’s equity. • The market value of stock does not depend on the historical cost of the company’s assets. • Instead it depends on what investors expect those assets to produce in the future. • www.HelpWithAssignment.com

11. Market value and Book value contd • This is not surprising that it will differ substantially from the amount investors are willing to pay for the equity. • The total market value of a company’s equity equals the market price per share times the number of shares, referred to as the company’s market capitalization. • www.HelpWithAssignment.com

12. Balance Sheet Analysis • A great deal of useful of information from a firm’s balance sheet can be obtained. • These include Market to Book Ratio, Debt- Equity Ratio, Enterprise Value, etc. • www.HelpWithAssignment.com

13. Income Statement • The Income Statement is a list of the company’s revenues and expenses over a period of time. • The last or the bottom line of the income statement shows the company’s net income, which is a measure of its profitability during the period. • The income statement is sometimes called a profit and loss statement and the net income is referred to as the company’s earnings. • www.HelpWithAssignment.com

14. Statement of Cash Flows • The income statement provides a measure of the company’s profit over a given time period. • However, it does not indicate the amount of cash the firm earned. • There are two reasons that net income does not correspond to cash earned. • www.HelpWithAssignment.com

15. Statement of Cash Flows • First, there are non-cash entries on the income statement, such as depreciation and amortization. • Second, certain uses of cash, such as the purchase of a building or expenditures on inventory, are not reported on the income statement. • www.HelpWithAssignment.com

16. Statement of Cash Flows • The company’s statement of cash flows utilizes the information from the income statement and balance sheet. • This information is used to determine how much cash the company has generated and how that cash has been allocated, during a set period. • www.HelpWithAssignment.com

17. Statement of Cash Flows • From the perspective of an investor attempting to value the firm, the statement of cash flows provides what may be the most important information of the four financial statements. • The statement is divided into three sections: operating activities, investment activities and financing activities. • www.HelpWithAssignment.com

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