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© Prentice-Hall of India Private Limited, All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore
© Prentice-Hall of India Private Limited, All rights reserved.2 Financial Statement Analysis Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.3 Objectives of Financial Statement Analysis Evaluation of past performance and financial position Prediction of future performance Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.4 Standards of Comparison Rule-of-thumb indicators Can be applied across firms and industries Too general to be of use in specific companies Past performance of the company Past is a useful indicator A firm’s competition is with other firms, not with own past Industry standards Getting comparable firms is difficult Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.5 Sources of Information Company reports Stock exchanges Business periodicals Information services Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.6 Quality of Earnings What is quality of earnings? Accounting methods and estimates used Extraordinary items Prior period adjustments Discontinuing operations Changes in accounting policies Income from non-operating sources Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.7 Using Financial Ratios Profitability Liquidity Solvency Capital market standing Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.8 Profitability Profit margin Asset turnover Return on assets or return on investment The Du Pont financial analysis Return on equity Effect of leveraging Earnings per share Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.9 Liquidity Current ratio All current assets Quick ratio Excludes inventories Debtor turnover Average debt collection period Inventory turnover Operating cycle Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.10 Solvency Debt-to-equity ratio Use of leverage Liabilities-to-equity ratio Interest coverage ratio Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.11 Capital Market Standing Price-earnings ratio Dividend-yield Price-to-book ratio Beta Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.12 Corporate Disclosure Policy Voluntary disclosure Why do firms provide voluntary disclosures? Factors that influence disclosure level Capital market Competitors Managerial reputation Shareholder litigation Disclosure level and the cost of capital Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.13 Efficient Market Hypothesis and Financial Statement Analysis The efficient market hypothesis Accounting information affects stock prices, but... The market is not fooled by accounting method differences Mandatory disclosures do not evoke significant stock price reaction Chapter 11
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PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. 1.1 ACCOUNTING Financial and Organisational.
1-1 What is the Goal of the Company? Maximization of Shareholder Wealth!
Powerpoint slides by: Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Michael L. Hockenstein Commerce Department Vanier College Intermediate Accounting.
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INTRODUCTION TO CASH FLOW ANALYSIS Chapter 10. CHAPTER 10 OBJECTIVES Explain the relationships between operating, investing, and financing cash flows.
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