Financial Statement Analysis

Course Structure

Part One: Introduction (Chapter 1)Part Two: 4 steps of analysis (Chapter 2-8) Part Three: Application in 4 different decision contexts:

security analysis, credit evaluation, merger and acquisition,corporate communication strategy

Chapter 1: Framework for Business Analysis and Valuation Using Financial Statements

Key Concepts in Chapter 1Financial statements are an important source of information to the capital markets and business analysts.

Analyzing financial statements addresses a number of issues of interest to external stakeholders and company insiders.

The Role of Financial Reporting in Capital MarketsFinancial reporting provide much-needed information to capital market participants

Financial intermediaries depend upon the information in financial statements to evaluate investment opportunities.Information intermediaries assure the quality of financial statement representations.Relevant and reliable financial information is essential for the functioning of capital markets.

How Capital Markets Function

From Business Activities to Financial StatementsFinancial statements measure and summarize the economic consequences of business activities.

Accounting systems facilitate information quality.The role of accrual accounting.The need for generally accepted accounting principles (GAAP).Auditing and the quality of financial information.

From Business Activities to Financial Statements

Financial Statements and Business AnalysisBusiness intermediaries use financial statements to accomplish four key objectives:

Business strategy analysisAccounting analysisFinancial analysisProspective analysis

Four Steps of Financial Statement Analysis

Concluding CommentsFinancial statements are source of widely available data on publicly traded corporations.

Accrual accounting attempts to accurately reflect expectations of economic performance, but requires careful analysis.

This chapter has outlined a useful framework for business analysis using financial statements.

Case Discussion:The 2008 Financial CrisisWhat is the intended role of each of the following institutions and intermediaries for the effective functioning of capital markets?The regulatorsThe companies and their management teamsThe financial market (the exchange)The information intermediariesThe financial intermediariesThe investorsHow does each of these parties use the financial statements?

Are their incentive aligned properly with their intended role? Whose incentives are most misaligned?

Who, if anyone, was primarily responsible for this subprime mortgage crisis?

What are the costs of such a financial crisis? As a future business professional, what lessons do you learn from the crisis?

Case Discussion:The 2008 Financial Crisis

***********