Outline Financial Statement Analysis
Chapter 13 … Analyzing Financial Statements
Chapter Outline
I. Basics of Analysis -- Transforming data into useful information for decision making.
A. Purpose of Analysis
To help users (both internal and external) make better business decisions.
1. Internal users (managers, officers, internal auditors, consultants, budget officers, and market researchers) make the strategic and operating decisions of a company.
2. External users (shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press) rely on financial statement analysis to make decisions in pursuing their own goals. 3. The common goal of all users is to evaluate:
a. Past and current performance.
b. Current financial position.
c. Future performance and risk.
B. Building Blocks of Analysis
The four areas of inquiry or building blocks are:
1. Liquidity and efficiency—ability to meet short-term obligations and to efficiently generate revenues.
2. Solvency—ability to generate future revenues and meet long-term obligations.
3. Profitability—ability to provide financial rewards sufficient to attract and retain financing.
4. Market Prospects—ability to generate positive market expectations.
C. Information for Analysis
1. Most users rely on general purpose financial statements that include:
a. Income statement
b. Balance sheet
c. Statement of changes in stockholders ' equity (or statement of retained earnings)
d. Statement of cash flows
e. Notes related to the statements
2. Financial reporting—is the communication of financial information useful for making investment, credit, and other business decisions. Includes information from SCE 10-K or other filings, press releases, shareholders ' meetings, forecasts, management letters, auditor 's reports, and Webcasts.
D. Standards for Comparisons
Used to determine if analysis measures suggest good, bad, or average performance. Standards can include the following types of
Chapter Outline
I. Basics of Analysis -- Transforming data into useful information for decision making.
A. Purpose of Analysis
To help users (both internal and external) make better business decisions.
1. Internal users (managers, officers, internal auditors, consultants, budget officers, and market researchers) make the strategic and operating decisions of a company.
2. External users (shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press) rely on financial statement analysis to make decisions in pursuing their own goals. 3. The common goal of all users is to evaluate:
a. Past and current performance.
b. Current financial position.
c. Future performance and risk.
B. Building Blocks of Analysis
The four areas of inquiry or building blocks are:
1. Liquidity and efficiency—ability to meet short-term obligations and to efficiently generate revenues.
2. Solvency—ability to generate future revenues and meet long-term obligations.
3. Profitability—ability to provide financial rewards sufficient to attract and retain financing.
4. Market Prospects—ability to generate positive market expectations.
C. Information for Analysis
1. Most users rely on general purpose financial statements that include:
a. Income statement
b. Balance sheet
c. Statement of changes in stockholders ' equity (or statement of retained earnings)
d. Statement of cash flows
e. Notes related to the statements
2. Financial reporting—is the communication of financial information useful for making investment, credit, and other business decisions. Includes information from SCE 10-K or other filings, press releases, shareholders ' meetings, forecasts, management letters, auditor 's reports, and Webcasts.
D. Standards for Comparisons
Used to determine if analysis measures suggest good, bad, or average performance. Standards can include the following types of