FINANCIAL STATEMENT RISK ANALYSIS Chapter 9. INTRODUCTION TO FINANCIAL STATEMENTS Used to make...
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FINANCIAL STATEMENT RISK ANALYSIS Chapter 9
FINANCIAL STATEMENT RISK ANALYSIS Chapter 9. INTRODUCTION TO FINANCIAL STATEMENTS Used to make business decisions Provide information about a company’s
INTRODUCTION TO FINANCIAL STATEMENTS Used to make business
decisions Provide information about a companys financial activities
Four Key Financial Statements: 1. Balance Sheet 2. Income Statement
3. Statement of Changes in Shareholders Equity 4. Statement of Cash
Flows
Slide 3
BALANCE SHEET Summarizes a companys assets, liabilities, and
shareholders equity at a specific point in time (snapshot) Based on
GAAP Accounting equation Assets Liabilities = Equity
Slide 4
BALANCE SHEET Assets Current Assets Cash Marketable Securities
Accounts/Notes Receivables Prepaid Expenses Inventories Fixed
Assets Land Buildings Equipment Intangibles such as goodwill,
patents, copyrights, and trademarks Liabilities Current Liabilities
Accounts/Wages/Taxes Payable Short-term Debt Noncurrent Liabilities
Long-term Debt Shareholders Equity Total Shareholders Equity
(Owners Equity) *p 9.7 for a sample balance sheet
Slide 5
INCOME STATEMENT Measures a companys performance of
profitability over a specific period of time Based on GAAP Reports
a companys profit gain or loss with its revenue
Slide 6
COMPONENTS OF THE INCOME STATEMENT Revenue: income that a
company receives from normal business activities such as from the
sale of goods and services to customers Expenses: outflow of money
to pay for a good or service Cost of goods sold Gross Profit: sales
minus cost of goods sold Operating Income: amount of profit from a
businesss operations after taking out operating expenses (EBIT) Net
Income: a companys earnings after subtracting all expenses bottom
line
Slide 7
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Shows increases or
decreases in the equity of the business from the beginning to the
end of the period 4 major components of shareholders equity: 1.
Paid-Capital 2. Retained Earnings 3. Accumulated Other
Comprehensive Income 4. Treasury Stock
Slide 8
COMPONENTS OF SHAREHOLDERS EQUITY Paid-In Capital Capital
contributed to a business by owners through the purchase of stock
from the business Retained Earnings Portion of profits kept by the
company to be reinvested in the business for future needs
Accumulated Other Comprehensive Income Measures gains and losses of
the company that have not been realized yet Includes changes in
pension costs, foreign currency investments, and
appreciation/depreciation of investments Treasury Stock The buying
back of a companys own stock *p 9.15 for a sample statement of
changes in stockholders equity
Slide 9
STATEMENT OF CASH FLOWS Purpose is to provide information about
a businesss cash receipts and cash payments during a period of time
Operating Activities reflect the transactions of operating cash
inflows and outflows Investing Activities show the cash inflows and
outflows in the purchase or sale of assets, the receiving or
selling of marketable securities, and payment of loans Financing
Activities include paying of dividends, issue or repurchase of the
companys stock, bonds, and other debt *p 9.16 for a sample
statement of cash flows
Slide 10
SUPPLEMENTAL SOURCES OF FINANCIAL INFORMATION Notes to
financial statements SEC filings Annual reports
Slide 11
NOTES TO FINANCIAL STATEMENTS Contain details to better explain
the data within the financial statements Summary of loss
contingencies is closely related to risk management and issues of
insurance Examples: Litigations Product warranty and defect
obligations Possibility of damage or loss of property due to
hazards
Slide 12
SEC FILINGS Financial statements and documents submitted to the
Securities and Exchange Commission Most frequently accessed reports
include the Form 10-K, Form 10-Q, and Form 8-K
Slide 13
SEC FILINGS Form 10-K : annually filed report that is similar
to the companys own annual report, only much more in detail Form
10-Q : shortened version of the 10-K; quarterly filed report that
provides a view of the companys condition financially for the prior
three months Form 8-K : a current report that is filed to announce
a major event to the shareholders
Slide 14
COMPANY ANNUAL REPORTS The formal documents reporting the
companys performance for the year Required sections of the annual
report includes the following: Financial statements and notes
Auditors report Report of management Managements discussion and
analysis of operations and financial position Other beneficial
financial data Companies may provide additional information that is
not required as well
Slide 15
REPORTS The Report of Management is an internal control report
acknowledging managements responsibility to the quality of
accounting principles, employee communications, and other internal
auditing procedures. Managements Discussion and Analysis of Results
(MD&A) gives a narrative explanation through managements
perception of how the company is performing, its current position,
and its future outlook.
Slide 16
SARBANES-OXLEY ACT OF 2002 Federal law put in place to protect
investors, enhance internal controls, and increase penalties for
fraudulent financial activity against corporate directors Increases
financial reporting transparency
Slide 17
INCOME STATEMENT TREND ANALYSIS Used to see how a business has
performed over two or more periods of time Usually applied to the
income statement Calculate the percentage of change from one year
to the next Annual Percentage Change Trend analysis can be helpful
in predicting the future prospects of a business
Slide 18
LIQUIDITY RISK Ratio Analysis Liquidity: how quickly an asset
can be converted to cash with no loss of value Can be measured
using: Working Capital = Current Assets Current Liabilities Current
Ratio = Current Assets / Current Liabilities Acid-Test Ratio =
(Current Assets Inventory) / Current Liabilities Also known as the
Quick Ratio
Slide 19
CAPITAL STRUCTURE The way a corporation finances its assets
through a mixture of long- term debt and equity Equity Common
stockholders versus Preferred stockholders Debt Short-term
liabilities: due within one year or less Long-term liabilities: due
in more than one year
Slide 20
FINANCIAL LEVERAGE The usage of debt to increase returns to
shareholders Financial leverage analysis compares the possible
earnings per share (EPS) under different levels of debt and equity
Return on Equity (ROE) = Net Income / Equity
Slide 21
LIMITATIONS OF FINANCIAL LEVERAGE Additional cost of increased
debt Cash flow availability and flexibility economized Increased
risk of default and possibility of bankruptcy
Slide 22
OPERATING LEVERAGE Components of a companys cost structure:
Fixed Costs : costs that basically remains unchanged regardless of
changes in production level or cost of goods and services Examples
include rent and interest Variable Costs : costs that vary
according to production output Examples include wages, utilities,
and raw materials used Changing these percentages influences
operating leverage Advantages and disadvantages for both fixed and
variable costs Vs. Financial leverage which is the use of Debt