Reading 12 - Intergration of Financial Statement Analysis Techniques Flashcards
What are the 6 steps in the framework for analysis of financial statements?
- Establish the objectives
- Collect data
- Process data
- Analyze data
- Develop and communicate conclusions
- Follow up
What is the input and output from the Establish the objectives of the Framework for Analysis?
Input
- Analyst’s perspective (evaluate a debt or equity investment)
- Needs communicated by client or supervisor
- Institutional guidelines
Output
- Purpose statement and specific questions to be answered
- Nature and content of final report
- Timetable and budget
What is the input and output from the Data Collection portion from the objectives of the Framework for Analysis?
Input:
- Financial Statements
- Communication with management, suppliers, customers and competitors
Output:
- Organized financial information
What is the input and output from the Processing the Data portion from the objectives of the Framework for Analysis?
**Just output**
Output:
- Adjusted financial statements
- Common-size statements
- Ratios
- Forecasts
What is the input and output from the Analyzing the Data portion from the objectives of the Framework for Analysis?
**Just output**
Output:
- Results of analysis
What is the input and output from the Develop and communicate conclusions portion from the objectives of the Framework for Analysis?
Input:
- Results from analysis using report guidelines
Output:
- Recommendations
What is the input and output from the Follow-Up portion from the objectives of the Framework for Analysis?
Input:
- Periodically update information
Output:
- Update analysis and recommendations
What is the formula for the DuPont ROE?
If a firm’s earnings are partially from Intercorporate Investments, what adjustment needs to be made to eliminate this bias?
**For influential investments (>20% but less than 50%) the equity method is used in which the investor recognizes its pro-rata shares of the investee’s earnings on the income statement
- This equity income should be removed from the DuPont analysis
- The balance sheet should also be updated by reducing the total assets by the carrying value of the investment
**effect on ratios
- Will decrease the investor firm’s earning and net profit margin
- Will increase total asset turner (since you have fewer assets)
What are some techiniques for analyzing a companies Asset Base?
Examine the composition of the balance sheet over time
- Common-size analysis is helpful
- Useful in identifying acquisitions and goodwill
- Recall that goodwill is no longer amortized but subject to impairment
Why is a firm’s capital structure important to consider when reviewing a firm?
**The capital structure must support management’s strategic objectives and allow the firm to honor is future obligations
- Examine long term debt to capital
- Some liabilities are less onerous than others and may not necessarily require an outflow of cash
- employee benefit obligations
- deferred taxes
- retructuring provisions
How do you calculate the Defensive Interval Ratio?
How do you calculate the Days’ Sales Outstanding?
How do you calculate the Days Inventory on Hand?
How do you calculate an Adjusted Profit Margin when you have to back out the effect of a Investment in Associates?
How do you calculate an Adjusted Total Asset Turnover ratio when you have to back out the effect of a Investment in Associates?
