Vol. 3 LM4 Financial Statement Analysis Framework Flashcards
List phases
financial statement analysis framework
Financial Ratio Analysis
- articulate the purpose
- collect input data
- process data
- analyze/interpret the processed data
Financial Ratio Analysis
sources of information
articulate the purpose
Financial Ratio Analysis
- the nature of the analyst’s function, such as evaluating an equity or debt investment
- communication with client or supervisor on needs and concerns
- institutional guidelines related to developing specific work product
Financial Ratio Analysis
sources of information
collect input data
Financial Ratio Analysis
- financial statements, other financial data, questionnaires, and industry/economic data
- discussions with management, suppliers, customers, and competitors
- company site visits
Financial Ratio Analysis
sources of information
process data
Financial Ratio Analysis
- data from the previous phase
Financial Ratio Analysis
sources of information
analyze/interpret the processed data
Financial Ratio Analysis
- input data as well as processed data
Financial Ratio Analysis
Output
Articulate the purpose
Financial Ratio Analysis
- statement of the purpose or objective of analysis
- a list of specific questions to be unanswered by the analysis
- nature and content of report to be provided
- timetable and budgeted resources for completion
Financial Ratio Analysis
sources of information
Develop and communicate conclusions
Financial Ratio Analysis
- analytical results and previous reports
- institutional guidelines for published reports
Financial Ratio Analysis
sources of information
follow-up
Financial Ratio Analysis
- information gathered by periodically
Financial Ratio Analysis
Concept
- a useful way of expressing these relationships
- express one quantity in relation to another (usually as a quotient)
Financial Ratio Analysis
ratios
Financial Ratio Analysis
Define
ratios
Financial Ratio Analysis
- a useful way of expressing these relationships
- express one quantity in relation to another (usualy as a quotient)
Financial Ratio Analysis
Ratio
net profit margin
Financial Ratio Analysis
a ratio of net income to revenue
Financial Ratio Analysis
purpose
using ratios in expressing financial values
Financial Ratio Analysis
- economic relationships within a company that help analysts project earnings and free cash flow
- a company’s financial flexibility, or ability to obtain the cash required to grow
- management’s ability
- changes in the company and/or industry over time
- comparability with peer companies or the relevant industry
Financial Ratio Analysis
A second important aspect of ratio analysis is that differences in ____ policies (across companies and across time) can distort ratios
Financial Ratio Analysis
accounting [policies]
Financial Ratio Analysis
The Operating income/Average total assets ratio shown above is one of many versions of the ____ ratio.
Financial Ratio Analysis
return on assets (ROA) ratio
Financial Ratio Analysis
When assets are growing, operating income divided by ending assets may not make sense because
Financial Ratio Analysis
some of the income would have been generated before some assets were purchased, and this would understate the company’s performance.
Financial Ratio Analysis
