Delta Publishing Company
DELTA PUBLISHING COMPANY P.O. Box 5332, Los Alamitos, CA 90721-5332
All rights reserved. No part of this course may be reproduced in any form or by any means, without permission in writing from the publisher.
Table of Contents
Preface Chapter 1 Objectives of Financial Statement Analysis and Financial Reporting Chapter 2 Accounting Assumptions, Principles, Procedures, and Policies Chapter 3 Understanding Financial Statements Chapter 4 An Overview of Financial Statement Analysis Chapter 5 Analysis of Liquidity and Activity Chapter 6 Analysis of Solvency and Capital Structure Chapter 7 Profitability Analysis Chapter 8 Market Strength and Overall Evaluation Chapter 9 Analysis of Cash Flows Chapter 10 Interim Statements and Segment Analysis
Analysis and Uses of Financial Statements is designed for interested parties who must understand how to read, interpret, and analyze financial statements. This course describes in clear, concise, and understandable language the intricacies of financial statements, and their use by investors, creditors, analysts, and other interested parties. This course can enhance your chance for success in business and investing; by enabling you to profit form the knowledge, insights, and perceptions of professionals who use financial statement analysis tools and techniques on a day-to-day basis. Realistic examples and illustrations of financial statement analysis are widely used in this course to make the subject matter crystal clear. That is the major objective of this course. This course explains the objectives of financial statements in a meaningful manner. The accounting principles used in compiling financial statements and the qualitative characteristics of data appearing on financial statements are relevantly and reliably described. After a thorough overview of financial statements, major tools and techniques as explained, including
Horizontal and vertical analysis Common-size statements Ratio analysis Liquidity and activity ratios Profitability ratios Capital structure and solvency ratios Market test ratios Cash flow ratios
The significance of interim financial statements and segment reporting is explored, as are analysis of annual reports and management discussion and analysis (MDA). The analytical techniques discussed in this course are well within the limits of today’s information technology. Once the concepts are understood, software can be used to eliminate much of the computational tedium involved.
CHAPTER 1 OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS AND FINANCIAL REPORTING LEARNING OBJECTIVES After reading this chapter, you should be able to: 1. Cite some real-life scenarios and understand why financial statement analysis is necessary to solve some puzzles presented by these scenarios. 2. Describe the focus of financial statement analysis. 3. Recognize the information needs of investors and creditors. 4. Understand the objectives of financial reporting. 5. Identify the qualitative characteristics of accounting information.
You are interested in the stock of a major financial institution as a possible investment. An article about the company in today’s issue of a financial journal raised some questions about the stock. The article noted that for the past three years, the company’s return on equity averaged 8.5 percent, compared with an estimated industry average of 15 percent. A major competitor’s return on equity rate was 16 percent. Although the company you are interested in doubled its revenue last year, this increase was not reflected in the return on equity or in the price of the stock. What would you make of this information? Are there reasons why you might want to investigate this stock further before making a decision? Two high-tech firms merged in the early 2000s. The acquiring company took on a large...