Financial Analysis Flashcards
When applying financial analysis, reviewing the financial statements of companies can be like navigating a map or a maze, what does that mean?
It means that there are different ways that a company can navigate its financial analysis. Navigating by map gives clear information and representation of understating of the company’s financial health. However navigating by maze means that the intention will be to confuse the user by giving a lot of information and complex policies. They usually have hidden key information.
•A map helps its user reach a desired destination through clarity of
representation.
• A maze attempts to confuse its user by purposefully introducing conflicting elements and complexities that prevent reaching the desired goal.
Financial Statements as a Maze
• Overwhelming amount of information
• Unreliable auditing
• Complex policies and reporting requirements
• Considerable discretion given to management
• Key information hidden or omitted
Financial Statements as a Map
• Form the basis for understanding the financial position of a firm
• Allow users to assess historical and prospective financial performance
• Present clear representations of a firm’s financial health
What is financial analysis?
Financial analysis is the process of evaluating financial and other information for decision-making.
A six-step approach for systematic financial analysis:
Step 1: Identify objective of financial analysis
Step 2: Corporate overview
Step 3: Financial analysis techniques
Step 4: Detailed accounting analysis
Step 5: Comprehensive analysis
Step 6: Decision or recommendation
What are the 4 Basic Financial Statements and what is the purpose of each one?
-Balance Sheet: Summarize what a company owns or owes at a point. Also called statement of financial position.
-Income Statement: Reports how much a company earned in a period of analysis. Presents revenues, expenses and net income
-Statement of changes in equity: How much of the owner’s interest is in the company and how this equity changes over the time. You can know the net income and net losses. Net income increases total equity. Net losses and dividends decrease total equity
-Cash Flows: This statement reports how much money inflows and outflows in the company.
Balance Sheet info de Assets
Assets: things you own that have value
Current Assets: Expected to be converted to cash within one year or one operating cycle
• Cash and cash equivalents
• Marketable/Trading securities
• Accounts receivable
• Notes receivables
• Inventories
• Prepaid Expenses
Non Current Assets/ Fixed Assets: not in one year
• Property, Plant and Equipment:
• Land
• Buildings
• Depreciation
• Equipment / Machinery
• Leasehold improvements
• Construction in progress
Other Assets/ Intangible: maybe not physical
• Goodwill
• Patents
• Other Assets
• Cryptocurrency
Balance Sheet de Liabilities
Things you owe
Current liabilities: Obligations due within a year
- Accounts payable
- Income Tax payable
- Rent payable
- Notes payable (short-term debt/loan)
- Deferred revenues
- Deferred taxes
- Unearned revenue (deferred credits)
- Leases
- Accrued liabilities/expenses
- Other current liabilities
Non-current liabilities
- Long-term Debt/loan from bank
- Bonds payable (+)
- Discount on bonds payable (-)
- Pension liabilities
Balance Sheet de Stockholders Equity
Portion of the company that belongs to its owners (shareholders)
Also called shareholders’ equity or owner’s equity Residual interest in assets that remains after deducting liabilities
• Common Stock
• Preferred Stock
• Additional Paid-In Capital
• Retained Earnings
• Other Equity Accounts
What is Common Size Analysis in the Balance Sheet? And what are the formulas?
Common size analysis in the balance sheet expresses each item as a percentage that helps to analyze trends over time or compare companies.
Vertical Analysis: expresses each item as a percentage of a base amount, and compares items within a single financial statement.
Horizontal Analysis: compares financial data over time to see changes. The financial statements for two years are shown together with additional columns showing percentage changes
Vertical Analysis:
Percentages indicate the proportions of items with “sales revenue” or “net sales” as the 100%-base, comparing two companies.
Formula: Each item / Net Sales
Horizontal financial statement analysis
Formula: Current Period - Base Period / Base Period
- Prepare the Balance Sheet
Assets: things you own that have value
Current Assets: Expected to be converted to cash within one year or one operating cycle
• Cash and cash equivalents
• Marketable/Trading securities
• Accounts receivable
• Notes receivables
• Inventories
• Prepaid Expenses
Non Current Assets/ Fixed Assets:
• Property, Plant and Equipment:
• Land
• Buildings
• Depreciation
• Equipment / Machinery
• Leasehold improvements
• Construction in progress
Other Assets/ Intangible:
• Goodwill
• Patents
• Other Assets
• Cryptocurrency
Important formulas for Balance Sheet
Retained earnings = Total Assets - Total Liabilities - Total Equity
Shareholders’ Equity = Assets - Liabilities
Total Assets = Liabilities + Shareholders Equity
Explain briefly what inventory is and identify the items typically included in this category.
Inventory refers to the goods and materials a company holds for the purpose of selling them or producing finished products.
Items Included in Inventory:
1. Raw Materials: Basic materials used to produce goods.
2. Work-in-Progress (WIP): Partially finished products still in production.
3. Finished Goods: Completed products ready for sale.
4. Merchandise: Goods purchased for resale (common in retail)
Why is inventory valuation important, and what are the common inventory accounting methods used for valuation?
It shows the company’s profit, affects financial statements, helps with decision-making, and ensures tax compliance.
**
Inventory valuation determines the cost of items sold, which directly affects the income statement and net profit. The value of unsold/ending inventory is reported on the balance sheet as a current asset.
FIFO (First In, First Out): Oldest inventory is sold first.
LIFO (Last In, First Out): Newest inventory is sold first.
Weighted Average Cost: Averages the costs of all inventory.
Lowest COGS: increases profit, highest net income
Highest COGS: reduces profit, lowest net income
Inventory valuation is important because:**
It affects the balance sheet (assets) and income statement (cost of goods sold and profit).
Profit Measurement:
Tax Compliance: Determines taxable income; undervaluing inventory can lead to penalties.
Decision-Making: Helps businesses manage costs, pricing, and inventory levels.
Performance Analysis: Allows for evaluating operational efficiency and inventory management
What is depreciation and Which depreciation methods are commonly used by companies?
Depreciation spreads the cost of an asset (like equipment) over its useful life. It shows how much the asset is used each year.
Straight-line : an equal amount of expense to each year of the depreciation period. You divide the cost evenly over the years. It’s like spending the same amount each year until the item is fully used up.
Accelerated You take more value off in the earlier years and less later. It’s like saying things lose value faster at the beginning.
Units-of-production: You calculate depreciation based on how much the item is actually used.
What is goodwill, and where does it appear on the financial statements?
Goodwill is an intangible asset that represents the value of a company’s reputation, brand, customer relationships, or other non-physical assets acquired during a business acquisition.
In Balance Sheet in Other / Intangible Assets
- What is short-term debt, and where does this item belong on the financial statement?
Short-term debt is money a company borrows that must be repaid within one year or within its operating cycle, whichever is longer.
Está en: Balance Sheet in Current Liabilities
Also referred to as notes payable
- What is an Accrued liability?
Assume that a company has a 100,000€ note outstanding with 9% interest. Interest will be accrued for three months The December balance sheet would include an accrued liability of…
An accrued liability is an expense a company has had but has not paid yet. It presents an obligation the company must pay in the future.
Examples of accrued liabilities:
Salaries and wages that employees have earned but haven’t been paid yet.
Taxes owed that have not yet been paid
