Introduction to Financial Statement Analysis

  "What do unique products with few substitutes enhance? - CORRECT ANSWER Profitability" "Buyer Power relates to what 2 things? - CORRECT ANSWER 1- The relative NUMBER OF BUYERS AND SELLERS in the industry and the leverage buyers have with respect to price 2- Relates to buyers' PRICE SENSITIVITY and the ELASTICITY of demand. Are the buyers PRICE TAKERS or PRICE SETTERS?" "Supplier Power relates to... - CORRECT ANSWER Leverage in NEGOTIATING input prices from suppliers." "If an industry has a large number of potential buyers of inputs that are produced by relatively few suppliers, the suppliers will... - CORRECT ANSWER have greater power in setting prices and generating profits." "5 Economic Attributes Framework - CORRECT ANSWER 1- Demand 2- Supply 3- Manufacturing 4- Marketing 5- Investing & Financing" "4 Demand related questions to ask are: - CORRECT ANSWER 1- Are customers HIGHLY price-sensitive RELATIVELY insensitive? 2- Is demand GROWING RAPIDLY or is the industry RELATIVELY MATURE? 3- Does demand move WITH the economic cycle or is it insensitive to it? 4- Does demand VARY with the seasons or is it RELATIVELY STABLE throughout the year." "3 Supply related questions to ask are: - CORRECT ANSWER 1- Are supplier offering SIMILAR or UNIQUE products? 2- Are there HIGH BARRIERS to ENTRY? (Start up costs) 3- Are there HIGH BARRIERS to EXIT? Such as cleanup costs" "2 Manufacturing related questions to ask are: - CORRECT ANSWER 1- Is the manufacturing process CAPITAL intensive or LABOR intensive... or combination of both? 2- Is the manufacturing process complex with LOW TOLERANCE for error, or relatively simple with RANGES of products that are of acceptable quality?" "2 Marketing related questions to ask are: - CORRECT ANSWER 1- Is the product promoted to other businesses or marketed directly to consumers? 2- Does steady demand pull products through distribution channels, or must firms continually create demand?" "3 Investing and Finance related questions to ask are: - CORRECT ANSWER 1- Are the assets of firms in the industry relatively ST or LT? 2- Is there relatively low risk or high risk in the assets of firms in the industry? 3- Is the industry relatively profitable and mature, generating enough cash flows or growing rapidly and in need of external financing?" "4 Components to the Framework for Strategy Analysis are - CORRECT ANSWER 1- Nature of product or service 2- Integration within value chain 3- Geographical diversification 4- Industry diversification" "2 Strategies on Nature of Product or Service are: - CORRECT ANSWER 1- Product differentiation strategy 2- Low-cost leadership strategy" "Product differentiation strategy refers to - CORRECT ANSWER unique products in order to achieve relatively high profit margins" "Low Cost leadership strategy refers to - CORRECT ANSWER non-differentiated products and accepting a lower profit margin in return for a higher sales volume and market share" "A question to ask in the Integration in Value Chain regarding Manufacturing is - CORRECT ANSWER Is the firm conducting all manufacturing operations itself, outsourcing all manufacturing, or outsourcing the manufacturing of components but conducting the assembly operation in-house?" "A question to ask in the Integration in Value Chain regarding Distribution is - CORRECT ANSWER Is the firm maintaining control over the distribution function or outsourcing it?" "A question to ask in Geographical Diversification is? - CORRECT ANSWER Is the firm targeting its products to its DOMESTIC market or integrating HORIZONTALLY across many countries?" What is the 6 step process in Financial Statement Analysis? - CORRECT ANSWER 1- Identify Economic Characteristics and Competitive Dynamics in the Industry 2- Identify Company Strategies 3- Assess the Quality of the Financial Statement 4- Analyze Profitability, Growth and Risk 5- Project Future Financial Statements 6- Value the Firm" "Economic characteristics and competitive dynamics influences...? - CORRECT ANSWER The strategies firms will employ" "Analysts should consider the economic characteristics and competitive dynamics while... - CORRECT ANSWER analyzing and forecasting financial statements" "3 Tools for Studying Industry Economics are: - CORRECT ANSWER 1 - Porter's Five Forces Classification Framework 2- Value Chain Analysis 3- Economic Attributes Framework" "2 Types of competition in Porter's Five Forces Classification Framework are: - CORRECT ANSWER 1- Horizontal Competition 2- Vertical Competiton" "3 Types of Horizontal Competition in Porter's Five Forces Classification Framework are: - CORRECT ANSWER 1- Rivalry among EXISTING Firms 2- Threat of NEW Entrants 3- Threat of SUBSITUTES" "2 Types of Vertical Competition in Porter's Five Forces Classification Framework are: - CORRECT ANSWER 1- BUYING Power 2- SUPPLING Power" "What is often the first order of competition? - CORRECT ANSWER Rivalry among EXISTING Firms" "Industries are characterized by what 2 types of rivalries among EXISTING firms? - CORRECT ANSWER 1- Concentrated Rivalry 2- Diffuse Rivalry" "The greater the industry concentration - CORRECT ANSWER the lower the competition between existing rivals and thus the more profitable the firms will be." "3 Threat of New Entrants Questions to ask are: - CORRECT ANSWER 1- How easily can new firms ENTER A MARKET? 2- Are there ENTRY BARRIERS? 3- Do the existing rivals have distinct COMPETITIVE ADVANTAGES making it difficult for other firms to enter and compete?" "What happens if existing rivals have distinct competitive advantages making it difficult for other firms to enter and compete? - CORRECT ANSWER Firms in the industry will likely generate HIGHER profits than if new entrants can enter the market easily." "2 Threat of Substitutes Questions to ask are: - CORRECT ANSWER 1- How easily can customers SWITCH to substitute products or services? 2- How LIKELY are they to switch?" "What happens to competition and profitability with close substitutes? - CORRECT ANSWER competition increases and profitability decreases" "A question to ask in Industry Diversification is? - CORRECT ANSWER Is the firm operating in a SINGLE INDUSTRY or diversifying across MULTIPLE INDUSTRIES?" "5 Financial Statements are: - CORRECT ANSWER 1- Income Statement 2- Balance Sheet 3- Statement of Cash Flows 4- Statement of Shareholders' Equity 5- Statement of Comprehensive Income" "Noncurrent Liabilities includes... (3) - CORRECT ANSWER 1- Long term debt obligations 2- Other Liabilities 3- Deferred Income taxes" "Firms residual interest or claim relates to what statement? - CORRECT ANSWER Shareholders' Equity" "Shareholders' Equity includes (4) - CORRECT ANSWER 1- Amounts initially contributed by shareholders for an interest in a firm. 2- Cumulative net income in excess of dividends declared. 3- Shareholders' equity effects the recognition or valuation of certain assets or liabilities. 4- Treasury stock" "An analyst recognizes resources of a firm that generate future cash flows appear as assets only if... (2) - CORRECT ANSWER 1- they were acquired from another firm 2- have measurable acquisition cost." "An analyst recognizes nonmonetary assets are reported at... (3) - CORRECT ANSWER 1- Acquisition cost 2- Net of Accumulated Depreciation 3- Amortization" "Analyst recognizes rights to use resources and commitments to make future payments may.... - CORRECT ANSWER not appear as assets and liabilities." "Analyst recognizes noncurrent liabilities appear at... - CORRECT ANSWER the present value of expected cash flows discounted at an interest rate prevailing when the liability initially arose." "Income Statement is AKA - CORRECT ANSWER profit and loss statement" "Income Statement provides... - CORRECT ANSWER information about the profitability of firm for a period of time" "Under accrual basis of accounting, revenue is recognized when (2) - CORRECT ANSWER 1- it has completed ALL (or SUBSTANTIALLY all) of the revenue-generating process by delivering products or services to customers 2- It is reasonably certain that it has satisfied a liability or generated an asset that it can measure reliably" "Statement of Cash Flows assesses... - CORRECT ANSWER A firm's past ability to generate free cash flows and for predicting future free cash flows." "3 categories of statement of cash flows - CORRECT ANSWER 1- Operating Activities 2- Investing Activities 3- Financing Activities" "Transactions not directly involving cash are disclosed either in 1. ____________ OR 2. ___________ - CORRECT ANSWER 1- A supplementary schedule 2- A note to the statement of cash flows" "3 Tools to analyze profitability and risk: - CORRECT ANSWER 1- Common-size Financial Statements 2- Percentage change Financial Statements 3- Financial Statement Ratios" "2 Examples of Financial Statement Ratios involving PROFITABILITY: - CORRECT ANSWER 1- Earnings per Share 2- Return on Capital Employed" "2 Examples of Financial Statement Ratios involving RISK: - CORRECT ANSWER 1- Current Ratio 2- Debt to Equity Ratio" "Forecasts are the inputs into 1._________ and the quality of the decisions rests on 2. ____________ - CORRECT ANSWER 1- valuation models 2- the reliability of the forecasts" "Forecasted financial statements rely on... - CORRECT ANSWER Assumptions the analyst makes about the future" "Amounts from the forecasted financial statements serve as.... - CORRECT ANSWER the basis for the valuation models" "6 Approaches to Value of the Firm - CORRECT ANSWER 1- Dividends 2- Earnings 3- Cash Flows 4- Market" "What 3 Value of the firm approaches give the same value? - CORRECT ANSWER 1- Dividends 2- Earnings 3- Cash Flows" "Stock Market Prices react with a high degree of EFFICIENCY to - CORRECT ANSWER to published information about a firm" "An implication of a highly efficient capital market is that - CORRECT ANSWER analysts and investors have more difficulty finding undervalued or overvalued securities" "4 Sources of Financial Statement Information - CORRECT ANSWER 1- Annual Report to Shareholders 2- Form 10K Annual Report 3- Form 10Q Quarterly Report 4- Prospectus or Registration Statement" ""Income Statement - CORRECT ANSWER A financial statement showing the revenue and expenses for a fiscal period." "Balance Sheet - CORRECT ANSWER A financial statement that reports assets, liabilities, and owner's equity on a specific date." "Statement of Cash - CORRECT ANSWER shows movement of cash from a beginning of a period to the end of a period, inflows and outflows of cash" "Statement of Shareholders' Equity - CORRECT ANSWER statement disclosing the source of changes in the shareholders' equity accounts." "Statement of Comprehensive Income - CORRECT ANSWER A financial document showing a company's income and expenditure over a particular time period, usually one year" "Which 4 out of the 5 statements are required? - CORRECT ANSWER 1- Income Statement 2- Balance Sheet 3- Statement of Cash Flows 4- Statement of Shareholders' Equity" "Which statement out of the 5 is optional? - CORRECT ANSWER Statement of Comprehensive Income" "Accounting Information should be (2) - CORRECT ANSWER 1- A FAIR and COMPLETE representation of the firm's economic performance, financial position and risk 2- Provide RELEVANT INFORMATION to forecast the firm's expected future earnings and cash flows." "GAAP Determines - CORRECT ANSWER the valuation and measurement methods used in preparing financial statements." "The SEC has the legal authority to 1.______________, but it has 2.____________ - CORRECT ANSWER 1- specify ACCEPTABLE ACOUNTING PRINCIPLES in the United States 2- delegated that authority to FASB" "Balance Sheet is AKA - CORRECT ANSWER statement of financial position" "Assets= - CORRECT ANSWER liabilities + stockholders equity" "In the balance sheet, assets portion reports... - CORRECT ANSWER the effects of a firm's operating decisions and investing decisions" "In the balance sheet, liabilities and shareholders' equity portion reports... - CORRECT ANSWER obligations that arise from a firm's operating decisions and financing decisions." "A firm can recognize as assets only those resources (2): - CORRECT ANSWER 1- For which it has the rights to FUTURE ECONOMIC BENEFITS as a result of a past transaction or event. 2- For which the firm can PREDICT and MEASURE, the future benefits with a reasonable degree of precision and reliability." "Assets are categorized into what 4 groups? - CORRECT ANSWER 1- Current Assets 2- Investments 3- Property, Plant & Equipment 4- Intangibles" "Liabilities reflect... - CORRECT ANSWER managers' expectations of FUTURE SACRIFICES of resources to satisfy existing obligations." "Liabilities are categorized into what 2 groups: - CORRECT ANSWER 1- Current Liabilities 2- Noncurrent Liabilities" "Current liabilities includes obligations a firm expects to settle within... - CORRECT ANSWER ONE YEAR"