Financial Statement Analysis

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Chapter 2
Introduction to Financial Statement Analysis

2-1.What are the four main financial statements? What checks are there on the accuracy of these statements?

The four financial statements are: the balance sheet, the income statement, the statement of cash flows, and the statement of changes in shareholders’ equity. Financial are required to be audited by a neutral third party, who checks and ensures that the financial statements are prepared according to GAAP or accounting standards and that the information contained is reliable.

2-2.Who reads financial statements? List at least three different categories of user. For each category, provide an example of the type of information they might be interested in and discuss why.

Users of financial statements include present and potential investors, financial analysts, and other interested outside parties (such as lenders, suppliers and other trade creditors, and customers). Financial managers within the firm also use the financial statements when making financial decisions.

Investors. Investors are concerned with the risk inherent in and return provided by their investments. Bondholders use the firm’s financial statements to assess the ability of the company to make its debt payments. Stockholders use the statements to assess the firm’s profitability and ability to make future dividend payments.

Financial analysts. Financial analysts gather financial information, analyze it, and make recommendations. They read financial statements to determine a firm’s value and project future earnings, so that they can provide guidance to businesses and individuals to help them with their investment decisions.

Managers. Managers use financial statement to look at trends in their own business, and to compare their own results with that of competitors.

2-3.Find the most recent financial statements for Starbucks’ corporation (SBUX) using the following sources:

a.From the company’s Web site www.starbucks.com (Hint : Search for “investor relations.”)

b.From the SEC Web site www.sec.gov. (Hint : Search for company filings in the EDGAR database.)

c.From the Yahoo! Finance Web site http://finance.yahoo.com.

d.From at least one other source. (Hint : Enter “SBUX 10K” at www.google.com.)

Each method will help find the same SEC filings. Yahoo! Finance also provides some analysis such as charts and key statistics.

2-4.Consider the following potential events that might have occurred to Nokia on December 30, 2007. For each one, indicate which line items in Nokia’s balance sheet would be affected and by how much. Also indicate the change to Nokia’s book value of equity.

a.Nokia used $20 million of its available cash to repay $20 million of its long-term debt.

b.A warehouse fire destroyed $5 million worth of uninsured inventory.

c.Nokia used $5 million in cash and $5 million in new long-term debt to purchase a $10 million building.

d.A large customer owing $3 million for products it already received declared bankruptcy, leaving no possibility that Nokia would ever receive payment.

e.Nokia’s engineers discover a new manufacturing process that will cut the cost of its flagship product by over 50%.

f.A key competitor announces a radical new pricing policy that will drastically undercut Nokia’s prices.

a.Non-current liabilities would decrease by $20 million, and cash would decrease by the same amount. The book value of equity would be unchanged.

b.Inventory would decrease by $5 million, as would the book value of equity.

c.Non-current assets would increase by $10 million, cash would decrease by $5 million, and non-current liabilities would increase by $5 million. There would be no change to the book value of equity.

d.Accounts receivable would decrease by $3 million, as would the book value of equity....
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