Financial Statement & Ratio Analysis

• Financial accounting provides a standardized way to report a company's financial performance and position
• It is primarily for external users like investors, creditors, and regulators

Financial Statement Analysis

• Financial statement analysis involves using financial statements to assess a company's past performance, current condition, and future prospects
• Common techniques include ratio analysis, trend analysis, and comparative analysis

Ratio Analysis

• Ratio analysis involves calculating and interpreting various financial ratios to evaluate a company's performance
• Liquidity ratios measure a company's ability to meet its short-term obligations
• Current Ratio = Current Assets / Current Liabilities; a higher ratio indicates better liquidity
• Quick Ratio = (Current Assets - Inventory) / Current Liabilities; a more conservative measure of liquidity
• Activity ratios measure how efficiently a company is using its assets
• Inventory Turnover = Cost of Goods Sold / Average Inventory; a higher turnover indicates efficient inventory management
• Receivables Turnover = Net Credit Sales / Average Accounts Receivable; a higher turnover indicates efficient collection of receivables
• Profitability ratios measure a company's ability to generate profits
• Gross Profit Margin = (Net Sales - Cost of Goods Sold) / Net Sales; indicates the profitability of sales after considering the cost of goods sold
• Net Profit Margin = Net Income / Net Sales; indicates the overall profitability of sales after all expenses
• Return on Assets (ROA) = Net Income / Average Total Assets; measures how efficiently a company is using its assets to generate profit
• Return on Equity (ROE) = Net Income / Average Stockholders' Equity; measures the return earned on shareholders' investment
• Solvency ratios measure a company's ability to meet its long-term obligations
• Debt-to-Assets Ratio = Total Debt / Total Assets; indicates the proportion of assets financed by debt
• Debt-to-Equity Ratio = Total Debt / Total Stockholders' Equity; indicates the amount of debt used to finance assets relative to equity

Trend Analysis

• Trend analysis involves analyzing financial data over a period of time to identify patterns and trends
• It helps in understanding the direction of a company's performance and predicting future results
• Horizontal analysis is a common technique used in trend analysis, which involves comparing financial data from different periods

Comparative Analysis

• Comparative analysis involves comparing a company's financial data with that of its competitors or industry averages
• It helps in assessing a company's relative performance and identifying areas for improvement
• Benchmarking is a common technique used in comparative analysis, which involves comparing a company's performance against best-in-class companies

Capital Structure

• Capital structure refers to the mix of debt and equity a company uses to finance its assets
• Optimal capital structure minimizes the cost of capital and maximizes the value of the firm
• Factors influencing capital structure decisions include business risk, tax rates, and financial flexibility

Cost of Capital

• Cost of capital is the rate of return a company must earn on its investments to satisfy its investors
• Weighted Average Cost of Capital (WACC) is the average cost of all sources of financing, weighted by their proportion in the capital structure
• Cost of Debt is the return required by lenders on the company's debt
• Cost of Equity is the return required by equity holders on their investment in the company

Leverage

• Leverage refers to the use of debt financing to amplify returns
• Financial leverage can increase returns to shareholders but also increases financial risk
• Operating leverage refers to the extent to which a company uses fixed costs in its operations
• High operating leverage can lead to higher profits but also higher losses

Dividend Policy

• Dividend policy refers to the decisions a company makes regarding the distribution of earnings to shareholders
• Factors influencing dividend policy include the company's profitability, growth opportunities, and financial stability
• Common dividend policies include constant dividend payout ratio, stable dollar dividend, and residual dividend policy

Working Capital Management

• Working capital management involves managing a company's current assets and current liabilities to ensure efficient operations
• Key components of working capital include cash, accounts receivable, inventory, and accounts payable
• Efficient working capital management improves liquidity and reduces the need for external financing

Cash Management

• Cash management involves optimizing the flow of cash into and out of a company
• Techniques for effective cash management include cash budgeting, cash forecasting, and managing cash balances
• The goal is to ensure that a company has enough cash to meet its obligations while minimizing the cost of holding excess cash

Accounts Receivable Management

• Accounts receivable management involves managing the credit and collection policies to minimize bad debts and speed up cash flow
• Techniques include credit analysis, setting credit terms, and monitoring collection performance
• The goal is to balance the need to generate sales with the risk of non-payment

Inventory Management

• Inventory management involves managing the levels of inventory to meet customer demand while minimizing holding costs
• Techniques include economic order quantity (EOQ), just-in-time (JIT) inventory, and ABC analysis
• The goal is to optimize inventory levels to balance the costs of holding inventory with the risk of stockouts

Accounts Payable Management

• Accounts payable management involves managing the timing of payments to suppliers to maximize cash flow
• Techniques include taking advantage of early payment discounts and negotiating favorable payment terms
• The goal is to optimize payment timing to minimize the cost of financing while maintaining good relationships with suppliers

Capital Budgeting

• Capital budgeting is the process of evaluating and selecting long-term investments
• Common capital budgeting techniques include net present value (NPV), internal rate of return (IRR), and payback period
• These techniques help in determining whether a project is worth investing in based on its expected cash flows and returns

Net Present Value (NPV)

• Net Present Value (NPV) is the present value of future cash flows, minus the initial investment
• A positive NPV indicates that the project is expected to generate more value than its cost
• NPV is a preferred capital budgeting technique because it takes into account the time value of money

Internal Rate of Return (IRR)

• Internal Rate of Return (IRR) is the discount rate that makes the NPV of a project equal to zero
• If the IRR is greater than the cost of capital, the project is considered acceptable
• IRR can be problematic when comparing mutually exclusive projects or when dealing with non-conventional cash flows

Payback Period

• Payback period is the length of time required for an investment to recover its initial cost
• It is a simple and easy-to-understand capital budgeting technique
• Payback period does not consider the time value of money or cash flows beyond the payback period

Leasing

• Leasing is a financing alternative to purchasing assets, where a company obtains the right to use an asset for a specified period in return for periodic payments
• Types of leases include operating leases and capital leases
• Leasing can provide tax benefits, flexibility, and access to assets without a large upfront investment

Derivatives

• Derivatives are financial instruments whose value is derived from the value of an underlying asset, such as stocks, bonds, or commodities
• Common types of derivatives include futures, options, and swaps
• Derivatives can be used for hedging, speculation, and arbitrage

Hedging

• Hedging involves using derivatives to reduce the risk of loss from changes in market prices or interest rates
• Companies use hedging to protect themselves from adverse movements in exchange rates, commodity prices, and interest rates

Speculation

• Speculation involves using derivatives to profit from anticipated changes in market prices or interest rates
• Speculation is a high-risk, high-reward activity

Foreign Currency Accounting

• Foreign currency accounting involves translating financial statements of foreign subsidiaries into the reporting currency of the parent company
• Translation methods include the current rate method and the temporal method
• Exchange rate fluctuations can affect the reported financial performance and position of multinational corporations

Segment Reporting

• Segment reporting involves reporting financial information about a company's operating segments
• Operating segments are components of a company that earn revenues and incur expenses and whose operating results are regularly reviewed by management
• Segment reporting provides insights into the performance of different parts of a company's business

Earnings Per Share (EPS)

• Earnings Per Share (EPS) is a measure of a company's profitability per share of outstanding common stock
• Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding
• Diluted EPS takes into account the potential dilution from convertible securities and stock options

Stock Options

• Stock options give employees the right to purchase shares of the company's stock at a specified price within a specified period
• Stock options are a form of compensation that can incentivize employees to improve the company's performance
• Accounting for stock options involves determining the fair value of the options and recognizing compensation expense over the vesting period

Pensions

• Pensions are retirement plans that provide benefits to employees after they retire
• Types of pension plans include defined contribution plans and defined benefit plans
• Accounting for pensions involves measuring the pension obligation and recognizing pension expense

Income Taxes

• Accounting for income taxes involves recognizing the tax effects of transactions in the period in which they occur
• Deferred tax assets and deferred tax liabilities arise from temporary differences between the book and tax bases of assets and liabilities
• The goal is to recognize the tax consequences of events in the same period as the related revenues and expenses