LM 12: Applications of Financial Statement Analysis

Question 1

What 2 things should be included when analyzing and comparing past financial performance?

Answer 1

what happened
why it happened

Question 2

What can the top down approach be used for?

Answer 2

can be used by analysts to forecast industry sales and market shares

Question 3

The projection of a company’s future net income and cash flow begins with a:

Answer 3

top down approach

Question 4

What is credit analysis?

Answer 4

evaluation of credit risk

Question 5

What is credit risk?

Answer 5

possibility of losses due to failure to meet payment obligations

Question 6

What are the 4 quantitative factors commonly used in credit analysis? SBLF

Answer 6

1. Scale
2. Business Profile
3. Leverage & coverage
4. Financial policy

Question 7

What is screening in potential equity investments?

Answer 7

process used to reduce number of potential investments, make sure investments have certain characteristics

Question 8

What are the 2 steps in top down analysis in screening equity investments?

Answer 8

1. identify attractive market segments
2. choose individual investments within those segments

Question 9

What are 3 limitations of back testing? SLD

Answer 9

1. survivorship bias
2. look ahead bias
3. data snooping bias

Question 10

What is survivorship bias?

Answer 10

include only companies that survived during a period

Question 11

What is look ahead bias?

Answer 11

using unavailable or unrevealed data in analyzing or simulating historical events

data used to construct screen was not actually available at time portfolio was established

Question 12

What is data snooping bias?

Answer 12

researchers rely too much on findings of previous research

Question 13

What are 3 classifications for investments that will cause an analyst to make adjustments when comparing to other company financial statements?

Answer 13

1. trading
2. available for sale
3. held to maturity

Question 14

What are 4 classifications for inventory that will cause an analyst to make adjustments when comparing to other company financial statements?

Answer 14

the methods of inventroy
1. FIFO
2. LIFO
3. Specific identification
4. Weighted average

Question 15

What are 2 classifications for property, plant, and equipment that will cause an analyst to make adjustments when comparing to other company financial statements?

Answer 15

1. accounting method (eg. straight line)
2. estimates used in calculation (eg. useful life, salvage value)

Question 16

An analyst will most likely use the ratio of a company’s accumulated depreciation to its annual depreciation expense as an estimate of the:

a. share of useful life remaining
b. average age of the fixed asset base
c. average years of useful life remaining

Answer 16

b. average age of fixed asset base