Financial Statement Analysis - The Test Bank

Chapter 1 Overview of
Financial Statement Analysis REVIEW Financial statement analysis is one important step in business analysis.
Business analysis is the process of evaluating a company's economic
prospects and risks. This includes analyzing a company's business
environment, its strategies, and its financial position and performance.
Business analysis is useful in a wide range of business decisions such as
investing in equity or debt securities, extending credit through short or
long term loans, valuing a business in an initial public offering (IPO),
and evaluating restructurings including mergers, acquisitions, and
divestitures. Financial statement analysis is the application of
analytical tools and techniques to general-purpose financial statements and
related data to derive estimates and inferences useful in business
analysis. Financial statement analysis reduces one's reliance on hunches,
guesses, and intuition for business decisions. This chapter describes
business analysis and the role of financial statement analysis. The
chapter also introduces financial statements and explains how they reflect
underlying business activities. Several tools and techniques of financial
statement analysis are also introduced. Application of these tools and
techniques is illustrated in a preliminary business analysis of Dell.
OUTLINE
| |
|Introduction to Business analysis |
|Types of Business Analysis |
|Credit Analysis |
|Equity Analysis |
|Other Uses of Business Analysis |
|Managers |
|Mergers, Acquisitions, and Divestitures |
|Financial Management |
|External Auditors |
| |
|Components of Business Analysis |
|Business Environment and Strategy Analysis |
|Financial Analysis |
|Accounting Analysis |
|Prospective Analysis |
|Valuation |
|Financial Statement Analysis and Business Analysis |
| |
|Financial Statements-Basis of Analysis |
|Financial Statements Reflect Business Activities |
|Planning Activities |
|Financing Activities |
|Investing Activities |
|Operating Activities |
| |
|The Annual Report |
|Balance Sheet |
|Income Statement |
|Statement of Shareholders' Equity |
|Statement of Cash Flows |
|Links Between Financial Statements |
|Additional Information |
|Management Discussion and Analysis (MD&A) |
|Management Report |
|Auditor Report |
|Explanatory Notes |
|Supplementary Information |
|Social Responsibility Reports |
|Proxy Statements |
| |
|Financial Statement Analysis Preview |
|Analysis Tools |
|Areas of Preliminary Analysis |
|Comparative Financial Statement Analysis |
|Year-to-Year Change Analysis |
|Index-Number Trend Analysis |
|Common-Size Financial Statement Analysis |
|Ratio Analysis |
|Factors Affecting Ratios |
|Ratio Interpretation |
|Illustration of Ratio Analysis |
|Cash Flow Analysis |
| |
|Specialized Analysis Tools |
|Valuation Models |
|Debt Valuation |
|Equity Valuation |
|Analysis in an Efficient Market |
|Market Efficiency |
|Market Efficiency Implications for Analysis |
| |
|Book Organization |
| |
| | ANALYSIS OBJECTIVES | |
|Explain business analysis and its relation to financial statement |
|analysis |
| |
|Identify and discuss different types of business analysis |
| |
|Describe the component analyses that constitute business analysis |
| |
|Explain business activities and their relation to financial statements |
| |
|Describe the purpose of each financial statement and linkages between |
|them |
| |
|Identify relevant analysis information beyond financial statements |
| |
|Analyze and interpret financial statements as a preview to more detailed|
|analyses |
| |
|Apply several basic financial statement analysis techniques |
| |
|Define and formulate some fundamental valuation models |
| |
|Explain the purpose of financial statement analysis in an efficient |
|market |
QUESTIONS
1. Business analysis is the evaluation of a company's prospects and risks
for business decisions. Applicable business decisions include, among
others, equity and debt valuation, credit risk assessment, earnings
prediction, audit testing, compensation negotiations, and countless other
decisions. The objective of business analysis is to aid with decision
making by helping to structure the decision task, including an evaluation
of a company's business environment, its strategies, and its financial
position and performance. As a result, the decision-maker will make a
more informed decision. 2. Business analysis is the evaluation of a company's prospects and risks
for business decisions. Financial statements are the most comprehensive
source of information about a company. As a result, financial statement
analysis is an integral part of business analysis. 3. Some major types of business analysis include credit analysis, equity
analysis, management and control, analysis of mergers and acquisitions,
and others. Credit analysis is the evaluation of the ability of a
company to honor its financial obligations (i.e., pay all of its debts).
Current and potential creditors and debt investors perform credit
analysis. Equity analysis supports equity investment decisions. Equity
investment decisions involve buying, holding, or selling the stock of a
company. Current and potential investors perform equity analysis. Managers perform business analysis to optimize their managerial
activities. From business analysis, managers are better prepared to