CHAPTER 1CHAPTER 1

OVERVIEW OF FINANCIAL STATEMENT ANALYSIS

OBJECTIVESOBJECTIVES

• Identify and discuss overview and function of financial statement analysis.

• Explain business analysis and its relation to financial statement analysis.

• Identify the relevant analysis information beyond financial statements.

• Explain the part of accrual accounting in financial statement analysis.

• WHAT IS FINANCIAL STATEMENT?

• WHAT IS FINANCIAL STATEMENT ANALYSIS?

• WHAT ARE FINANCIAL STATATEMENT ANALYSIS TOOLS?

• WHO ANALYZE FINANCIAL STATEMENT?

INTRODUCTIONINTRODUCTION

• What is Financial Statement Analysis?– an analysis of the financial reports of a company in a certain

period of time by evaluating the company’s economic prospects and risks.

– Relies on the past accounting data in order to predict about the future of the firm. and identify problem areas.

– Includes analysis of company’s business environment, strategies and its financial position and performance.

– Fundamentals of financial planning and analysis applicable to both for profit-seeking and for non-profit-seeking organizations.

– Financial statement structure and analysis is discussed, with the objective of arriving at a financial model for an organization such as:

• Operating activities• Investing activities• Financing activities

– Financial statement analysis is also employed as a tool to predict the financial results based on a firm's strategic plans and objectives.

• What are financial statements?– The medium by which a company discloses

information concerning its financial performance.– Financial statements consist of:

• Income statement,• Balance sheet, and• Statement of Cash flow

• How to analyze financial statements?– The most commonly-used approaches across the

industries are:• Ratio analysis• Cash flow analysis• Common size analysis• Index trend analysis• Equity analysis and Valuation

• Why do we analyze the financial statements?– To identify the state of the company in terms of their

risk and return. Therefore, the results from the analysis will shed light as to the performance of the company.

• Who analyze the financial statements?– Investors– Creditors– Government

BUSINESS ANALYSISBUSINESS ANALYSIS

• Business analysis is process of evaluating company’s prospects and risks for the purpose of making business decisions. These business decisions extend to equity and debt valuation, credit risk assessment, earning predictions, audit testing, etc.

• It’s an aids in making informed decision by helping structure the decision task through an evaluation of a company’s business environment, its strategies, and its financial position and performance.

BUSINESS ANALYSIS

EXTERNAL FACTOREXTERNAL FACTOR INTERNAL FACTORINTERNAL FACTOR

Technology Information

Regulation Information

Competitors Information

Financial Statement

FINANCIAL STATEMENT

• A financial statement is a transaction that flow through business activities.

• Each transaction or exchange, for example, the sale of a product or the use of a rented building, contributes to the whole picture.

ASSETS• Current (Short-term)•Fixed (Long-term)•Other

LIABILITIES• Current•Long-term

Shareholder’sEQUITY

Debt

Stock

2

3

4

1Capital Supplied

Balance Sheet

Cash Flow

Sell EquityIssue Debt

Buy AssetsBuy Inventory

Make SalesPay CostsPay Taxes

Pay InterestPay Dividends

Retain profits or “repay” debt-holders(with interest) and stockholders (with dividend)

Retain Return

ACCRUAL ACCOUNTINGACCRUAL ACCOUNTING

• Accrual basis accounting - record both revenues and expenses when they occur. Accrual basis accounting is the method of accounting most businesses and professionals are required to use by law.

• In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid

EXERCISE !!!!!!!!!