Financial Statement Analysis

Acct 592

Summer 2003

Background

• Who are we?

• Name and contact info.

• Education

• Professional Certification

• Brief work history

• Expectations after graduation

Syllabus

Chapter 1

Overview of Financial Reporting and Financial Statement Analysis

Overview of Financial Statement Analysis

1. Identify the economic characteristics of the particular industry

2. Identify the strategies that a particular firm pursues to gain competitive advantage.

3. Understand the financial statements of the particular firm and cleanse them of nonrecurring and unusual items.

4. Assess the profitability and risk of the firm using information in the financial statements.

5. Value the particular firm.

Identify the Industry Economic Characteristics

• Value chain analysis:– Support activities

1. Firm infrastructure2. Human resources3. Technology4. Purchasing

– Primary activities1. Inbound logistics: Material receiving and storing2. Operations: manufacturing3. Outbound logistics: distribution order prodcessing4. Marketing and sales: advertising and selling5. Service: repair maintenance

Identify the Industry Economic Characteristics – cont.

• Porter’s five forces classification1. Buyer power – elasticity of demand

2. Supplier power – elasticity of supply

3. Rivalry among firms – forms of competition

4. Threat of new entrants – barriers to entry

5. Threat of substitutes – elasticity of demand

Identify the Industry Economic Characteristics – cont.

• Economic Attributes Framework1. Demand

2. Supply

3. Manufacturing

4. Marketing

5. Financing

First AssignmentDue: Start of Class 2

• One page maximum• One inch margins• 10 point font• Use Strunk and White for guidance on professional

writing• Choose a firm for your annual report• Analyze the firm using Porter’s classification

– See assignments on web site

• Do not plan on a perfect score

Resources

• Library web links

• Lexis/Nexis

• S&P Research Insight– Carver Hall computer labs

• SEC website (Edgar)

• Corporate website

Software

• Author’s software

• Self-constructed Excel spreadsheets

• Proprietary software– e.g., E-Trade; MSN; YahooFinance

Identify the company strategy: Framework for analysis

1. Nature of product or service

2. Degree of integration within the value chain

3. Degree of geographical diversification

4. Degree of industry diversification

Financial Statements

• Balance Sheet: measuring financial position• Income Statement: measuring operating

performance– Accrual versus cash flow accounting– Assessing the quality of earnings

• Statement of Cash Flows– Rationale for statement of cash flows– Classification

• Statement of Shareholders’ Equity (SRE)

Parties involved in the standard setting process

• FASB – set standards

• SEC – regulatory process

• SEC can override FASB

• EITF

Learn the sources of financial information about publicly held firms

• Annual report to shareholders

• Form 10-K annual report

• Form 10-Q quarterly report

• Prospectus or registration statement

• Form 20-F annual report

• Acronyms: BoD, GAAP, GAAS,MD&A

The Annual Report

• Promotional Information

• Letter to Shareholders’

• MD&A

• Financial Statements and Notes

• Auditor’s Report

• Management Report and Responsibilities

• Company Information

Winnebago Industries

Financial Statements

Basic Financial Analysis

1. Common size financial statements

2. Percentage change financial statements

3. Financial Statement Ratios• Profitability• Risk (Liquidity and Solvency)

4. Pro forma financial statements

Valuation Ratios

• Price-Earnings Ratio

• Market-to-Book Ratio

Chapter 2

Income Flows versus Cash Flows: Key Relationships in Understanding

the Dynamics of Business

Net Income and Cash Flows from Operations

• Methods of calculation– Direct Method – Indirect Method

• Articulation of Balance sheet and Income Statement

• Categories = Firm’s activities– Operating, Investing, and Financing

Nike Case

• Pages 62&63