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22; 2: Scope of Financial Statement Analysis
Terms in this set (11)
- to provide information about a company's performance, financial position, and changes in financial position that is useful to a wide range of users in making economic decisions
role of financial reporting by companies
- to use financial reports prepared by companies, combined with other information, to evaluate the past, current, and potential performance and financial position of a company for the purpose of making investment, credit, and other economic decisions
role of financial statement analysis
•Evaluating an equity investment for inclusion in a portfolio.
•Evaluating a merger or acquisition candidate.
•Evaluating a subsidiary or operating division of a parent company.
•Deciding whether to make a venture capital or other private equity investment.
•Determining the creditworthiness of a company in order to decide whether to extend a loan to the company and if so, what terms to offer.
•Extending credit to a customer.
•Examining compliance with debt covenants or other contractual arrangements.
•Assigning a debt rating to a company or bond issue.
•Valuing a security for making an investment recommendation to others.
•Forecasting future net income and cash flow.
In evaluating financial reports, analysts typically have a specific economic decision in mind. Examples of these decisions include the following
- the ability to earn a profit from delivering goods and services
- cash receipts in excess of cash disbursements
positive cash flows
- income minus expenses
- the difference between the prices at which goods or services are provided to customers and the expenses incurred to provide those goods and services.
- includes other income (such as investing income or income from the sale of items other than goods and services) minus the expenses incurred to earn that income
- its recognition is mostly independent from when cash is received or paid
Profit (or loss)
- The ability to meet short-term obligations
- the ability to meet long-term obligations
- the resources controlled by a company
- controlled as a result of past events
- something from which future economic benefits to the enterprise are expected to flow
- creditors' claims on the resources of a company
- present obligations of an enterprise arising from past events
- the settlement of which is expected to result in an outflow of resources embodying economic benefits
= assets - liabilities
- the residual interest in the assets after subtracting the liabilities