Financial statement analysis Flashcards
What are financial statements used for?
Used by insiders (managers) and outsiders (Creditors) to monitor firm operations and ensure their interests are being served.
What 3 things can managers do using financial statements?
- Assess current performance
- Monitor and control operations
- Forecast future performance
What are the three main accounting statements?
- Balance sheet
- Income statement
- Cash flow statement
What does the balance sheet do?
- Provides a snapshot of firm’s financial position
- States the assets a firm owns (on left) and how they’re financed (Debt or shareholder equity on right)
What is shareholder equity?
The difference in the value of the firm’s total assets and firm’s total liabilities. It is what shareholders would have left after the firm has discharged it’s liabilities.
What 3 things should a financial manager be aware of?
- Liquidity
- Debt vs equity
- Value vs cost
What is liquidity? (Use current/noncurrent assets)
The ease and quickness with which assets can be converted to cash. Current assets (turned into cash within 1yr) are most liquid and used to pay payroll etc. Non-current assets (don’t convert to cash from normal business activity) and aren’t used to pay expenses e.g. payroll.
Explain the three debt vs equity concepts
- Payment (debt payment generally fixed, dividends not fixed or guaranteed)
- Seniority (DH paid before EH, DH can force bankruptcy)
- Maturity (Debt matures after a fixed period, equity securities don’t mature)
Explain value vs cost
The value of assets is the accounting value, and this is compared to the IFRS determined market/fair (Demand driven) value of assets
Explain the income statement
The income statement measures business performance over a specific period. It is expressed as Revenue - expenses = profits
What are the income statement sections?
- Operations section (Revenues and expenses from principal operations)
- Non-operating section (Financing costs e.g. interest)
- Net income
What should the manager be aware of in the income statement?
- Non cash items (depreciation etc)
- Product costs (raw materials etc)
- Period costs (salaries) - selling and general admin expenses
Explain the cash flow statement
CFS is used by firms to explain the changes in their cash balances over a period of time by identifying all of the sources and uses of cash:
- Cash flows from operating activity
- Cash flows from investing activities
- Cash flows from financing activities
What are CFO, CFI and CFF?
CFoperations = cash flow from sales of goods/services CFinvesting = Cash flows arising from purchase and sale of long term assets CFFinancing = cash flows from financing purposes e.g. buybacks, issuing debt, paying dividends
Why and how do we standardise financial statements?
- Standardise to be able to compare companies of different sizes and currencies
- Standardise using percentages or financial ratios (ratio analysis)
