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Financial Statement Analysis I Session 1: Overview Instructor Paul Beretz, CICE
Overview <ul><li>Financial statements form the basis for understanding the financial position of a business/firm and for a...
What does financial analysis include? <ul><li>Ratio analysis </li></ul><ul><li>Cash flow (source and use) </li></ul><ul><l...
Financial statements mean different things to different people <ul><li>Stockholders </li></ul><ul><ul><li>Earnings per sha...
Where to find financial statements <ul><li>Sources </li></ul><ul><ul><li>Customer </li></ul></ul><ul><ul><li>Credit agenci...
What comprises a set of financial statements? <ul><li>Income statement/statement of stockholders’ equity (more in Session ...
Samples of three financial statements <ul><li>Balance Sheet </li></ul><ul><li>Profit and Loss </li></ul><ul><li>Funds Flow...
Balance Sheet
Profit and Loss Statement
Source of Funds
Footnotes <ul><li>Notes to financial statements are a critical part of the statements and must be read to understand the m...
Legato Systems - Footnotes Continued…for complete document reference PDF document: Legato Footnotes
Legato Systems – Footnotes (cont.) Continued…for complete document reference PDF document: Legato Footnotes
How Financial Statements May Be Presented <ul><li>“ Homemade” </li></ul><ul><li>Prepared by internal professional accounta...
Question for class discussion <ul><li>How would you measure the comfort level you would have with a financial statement th...
Management Discussion & Analysis <ul><li>Internal and External Source of Liquidity </li></ul><ul><li>Material Liquidity  D...
Role of the Auditor <ul><li>Let’s review and discuss the article below regarding the role of the auditor, edited by Michae...
Audit Report <ul><li>(see p. 15 of text, REC Inc) </li></ul><ul><li>“ We have audited…..” </li></ul><ul><li>” We conducted...
Annual Report <ul><li>Created and distributed by a business </li></ul><ul><li>Includes: </li></ul><ul><ul><li>Financial St...
Other Periodic Filings <ul><li>10Q Filing – quarterly financial reports required of public companies </li></ul><ul><li>8K ...
FASB and GAAP <ul><li>The SEC has U.S. congressional authority to set accounting polices and has delegated this to the Fin...
GAAP, FASB, and the SEC <ul><li>More detailed information about GAAP, FASB, and the SEC is contained in the PDF document G...
Session Objectives <ul><li>Have you met the following objectives for the Session? </li></ul><ul><ul><li>Understand the con...
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Financial Statement Analysis I Session 1

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Provides an overview of financial statements and how to interpret them.

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Financial Statement Analysis I Session 1

  1. 1. Financial Statement Analysis I Session 1: Overview Instructor Paul Beretz, CICE
  2. 2. Overview <ul><li>Financial statements form the basis for understanding the financial position of a business/firm and for assessing its historical and prospective financial performance. </li></ul><ul><li>The main purpose of financial analysis is to provide reasonable clues and answers to specific questions posed by problems of interest to the analyst. </li></ul>
  3. 3. What does financial analysis include? <ul><li>Ratio analysis </li></ul><ul><li>Cash flow (source and use) </li></ul><ul><li>Capital expenditure programs </li></ul><ul><li>External and internal conditions that have or could effect financial soundness of the customer </li></ul><ul><li>Trend analysis (change from period to period) </li></ul><ul><li>Accuracy and competency of financial statements (accountants letter and footnotes) </li></ul>
  4. 4. Financial statements mean different things to different people <ul><li>Stockholders </li></ul><ul><ul><li>Earnings per share and asset base </li></ul></ul><ul><li>Company management </li></ul><ul><ul><li>Cash available, expense levels, opportunities for financial growth, high profits (for lenders) </li></ul></ul><ul><li>Creditors </li></ul><ul><ul><li>Overall financial conditions: financial strength (balance sheet) and earnings power (profit and loss statement and cash flow) </li></ul></ul><ul><li>Bankers </li></ul><ul><ul><li>Assets to cover loans, operating profits, owner investment </li></ul></ul>
  5. 5. Where to find financial statements <ul><li>Sources </li></ul><ul><ul><li>Customer </li></ul></ul><ul><ul><li>Credit agencies </li></ul></ul><ul><ul><li>Lenders </li></ul></ul><ul><ul><li>Public Records </li></ul></ul>
  6. 6. What comprises a set of financial statements? <ul><li>Income statement/statement of stockholders’ equity (more in Session 3) </li></ul><ul><li>Balance sheet (Session 2) </li></ul><ul><li>Statement of retained earnings (Session 2) </li></ul><ul><li>Statement of shareholders’ equity (Session 2) </li></ul><ul><li>Statement of cash flows (a.k.a. Source and Use of Fund, Session 4) </li></ul><ul><li>Footnotes and Mgmt. Discussion (Session 1) </li></ul>
  7. 7. Samples of three financial statements <ul><li>Balance Sheet </li></ul><ul><li>Profit and Loss </li></ul><ul><li>Funds Flow </li></ul>Refer to samples in PDF document: Sample Financial Statements (statement_samples.pdf), available in the online classroom.
  8. 8. Balance Sheet
  9. 9. Profit and Loss Statement
  10. 10. Source of Funds
  11. 11. Footnotes <ul><li>Notes to financial statements are a critical part of the statements and must be read to understand the material presented. </li></ul><ul><li>If an analyst only looks at the “numbers,” often relevant facts that surround and impact the results may be missed. </li></ul>For examples of footnotes, refer to the PDF document: Legato Footnotes (legato_footnotes.pdf) available in the online classroom.
  12. 12. Legato Systems - Footnotes Continued…for complete document reference PDF document: Legato Footnotes
  13. 13. Legato Systems – Footnotes (cont.) Continued…for complete document reference PDF document: Legato Footnotes
  14. 14. How Financial Statements May Be Presented <ul><li>“ Homemade” </li></ul><ul><li>Prepared by internal professional accountant </li></ul><ul><li>Prepared by independent auditor from the company’s books but without audit </li></ul><ul><li>Compilation </li></ul><ul><li>Audited but qualified (disclaimer) </li></ul><ul><li>Audited with unqualified opinion </li></ul>
  15. 15. Question for class discussion <ul><li>How would you measure the comfort level you would have with a financial statement that fell into each category just described? </li></ul>
  16. 16. Management Discussion & Analysis <ul><li>Internal and External Source of Liquidity </li></ul><ul><li>Material Liquidity Deficiencies-Addressing </li></ul><ul><li>Capital Expenditures: Identify and Purpose </li></ul><ul><li>Mix and Change in Costs of Financing </li></ul><ul><li>Income Impacts </li></ul><ul><li>Costs & Revenue Relationship </li></ul><ul><li>Breakdown of Sales Increases </li></ul>
  17. 17. Role of the Auditor <ul><li>Let’s review and discuss the article below regarding the role of the auditor, edited by Michael Dennis, CBF, MBA, a frequent contributor to CMA (note that this article can be found also in the CMA Encyclopedia of Credit). </li></ul>Refer to the PDF document: Role of the Auditor (auditor_role.pdf) available in the online classroom.
  18. 18. Audit Report <ul><li>(see p. 15 of text, REC Inc) </li></ul><ul><li>“ We have audited…..” </li></ul><ul><li>” We conducted our audits….” </li></ul><ul><li>“ In our opinion….” </li></ul><ul><li>“ We have also audited…..” (Note: SOX, section 404 re; Internal Controls) </li></ul>
  19. 19. Annual Report <ul><li>Created and distributed by a business </li></ul><ul><li>Includes: </li></ul><ul><ul><li>Financial Statements </li></ul></ul><ul><ul><li>Reports from company officers about major company events of the prior year and forecasts for the next year </li></ul></ul><ul><li>Publicly traded companies file annual reports as “10K” with SEC (Securities and Exchange Commission) </li></ul>
  20. 20. Other Periodic Filings <ul><li>10Q Filing – quarterly financial reports required of public companies </li></ul><ul><li>8K Filing – other reports as events occur, such as change in auditing firms, bankruptcy </li></ul><ul><li>These filings are required by the SEC </li></ul>
  21. 21. FASB and GAAP <ul><li>The SEC has U.S. congressional authority to set accounting polices and has delegated this to the Financial Accounting Standards Board (FASB). </li></ul><ul><li>These accounting policies are called Generally Accepted Accounting Principles (GAAP). </li></ul>
  22. 22. GAAP, FASB, and the SEC <ul><li>More detailed information about GAAP, FASB, and the SEC is contained in the PDF document GAAP.FASB.SEC (available in the online classroom). </li></ul><ul><li>The following Web sites contain additional information: </li></ul><ul><li>GAAP: http://www.investopedia.com/terms/g/gaap.asp </li></ul><ul><li>Official FASB Web site: http://www.fasb.org </li></ul><ul><li>These links can be accessed on the classroom Web site. </li></ul>
  23. 23. Session Objectives <ul><li>Have you met the following objectives for the Session? </li></ul><ul><ul><li>Understand the concepts, expectations, technical and administrative areas that are part of the online course process offered by CMA. </li></ul></ul><ul><ul><li>Recognize the overall issues involved with financial statement analysis. </li></ul></ul>

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