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Cambridge Business Publishers, 2013 FI NANCI AL STATEMENT ANALYSI S & VALUATI ONThird Edition Peter D. Mary Lea Gregory A. Xiao-JunEaston McAnally Sommers Zhang Cambridge Business Publishers, 2013 Cambridge Business Publishers, 2013 3 Cambridge Business Publishers, 2013 4 Cambridge Business Publishers, 2013 5 Cambridge Business Publishers, 2013 6 Cambridge Business Publishers, 2013 7 Cambridge Business Publishers, 2013 8 Cambridge Business Publishers, 2013 9 Cambridge Business Publishers, 2013 10 Cambridge Business Publishers, 2013 11 Cambridge Business Publishers, 2013 12 Cambridge Business Publishers, 2013 13 Cambridge Business Publishers, 2013 Walgreens Cambridge Business Publishers, 2013 15 Cambridge Business Publishers, 2013 16 Cambridge Business Publishers, 2013 17 Cambridge Business Publishers, 2013 Many investment-type companies such as Berkshire Hathaway and high-tech companies such as Cisco Systems carry high levels of cash. Why is that? Is there a cost to holding too much cash? Is it costly to carry too little cash? The relative proportion of short-term and long-term assets is largely dictated by companies business models. Why is this the case? Why is the composition of assets on balance sheets for companies in the same industry similar? By what degree can a companys asset composition safely deviate from industry norms? 18 Cambridge Business Publishers, 2013 What are the trade-offs in financing a company by owner versus nonowner financing? If nonowner financing is less costly, why dont we see companies financed entirely with borrowed money? How do shareholders influence the strategic direction of a company? How can long-term creditors influence strategic direction? Most assets and liabilities are reported on the balance sheet at their acquisition price, called historical cost. Would reporting assets and liabilities at fair values be more informative? What problems might fair-value reporting cause? 19 Cambridge Business Publishers, 2013 20 Cambridge Business Publishers, 2013 21 Cambridge Business Publishers, 2013 22 Cambridge Business Publishers, 2013 Walgreens 23 Cambridge Business Publishers, 2013 Assume that a company sells a product to a customer who promises to pay in 30 days. Should the seller recognize the sale when it is made or when cash is collected? When a company purchases a long-term asset such as a building, its cost is reported on the balance sheet as an asset. Should a company, instead, record the cost of that building as an expense when it is acquired? If not, how should a company report the cost of that asset over the course of its useful life? Manufacturers and merchandisers report the cost of a product as an expense when the product sale is recorded. How might we measure the costs of a product that is sold by a merchandiser? By a manufacturer? 24 Cambridge Business Publishers, 2013 If an asset, such as a building, increases in value, that increase in value is not reported as income until the building is sold, if ever. What concerns arise if we record increases in asset values as part of income, when measurement of that increase is based on appraised values? Employees commonly earn wages that are yet to be paid at the end of a particular period. Should their wages be recognized as an expense in the period that the work is performed, or when the wages are paid? Companies are not allowed to report profit on transactions relating to their own stock. That is, they dont report income when stock is sold, nor do they report an expense when dividends are paid to shareholders. Why is this the case? 25 Cambridge Business Publishers, 2013 26 Cambridge Business Publishers, 2013 27 Cambridge Business Publishers, 2013 Walgreens 28 Cambridge Business Publishers, 2013 29 Cambridge Business Publishers, 2013 Walgreens Cambridge Business Publishers, 2013 What is the usefulness of the statement of cash flows? Do the balance sheet and income statement provide sufficient cash flow information? What types of information are disclosed in the statement of cash flows and why are they important? What kinds of activities are reported in each of the operating, investing and financing sections of the statement of cash flows? How is this information useful? Is it important for a company to report net cash inflows (positive amounts) relating to operating activities over the longer term? What are the implications if operating cash flows are negative for an extended period of time? 31 Cambridge Business Publishers, 2013 Why is it important to know the composition of a companys investment activities? What kind of information might we look for? Are positive investing cash flows favorable? Is it important to know the sources of a companys financing activities? What questions might that information help us answer? How might the composition of operating, investing and financing cash flows change over a companys life cycle? Is the bottom line increase in cash flow the key number? Why or why not? 32 Cambridge Business Publishers, 2013 33 Cambridge Business Publishers, 2013 34 Cambridge Business Publishers, 2013 35 Cambridge Business Publishers, 2013 36 Cambridge Business Publishers, 2013 37 Cambridge Business Publishers, 2013 38 Cambridge Business Publishers, 2013 39 Cambridge Business Publishers, 2013 40 Cambridge Business Publishers, 2013 41 Cambridge Business Publishers, 2013 42 Cambridge Business Publishers, 2013 43 Cambridge Business Publishers, 2013 44 Cambridge Business Publishers, 2013 n The theoretical linkage between earnings and stock prices is as follows: n current earnings predict future earningsn future earnings help determine expected future dividendsn these future dividends, when discounted, determine current stock price 45 Cambridge Business Publishers, 2013Studies find: excess annual returns of around 10-25% for earnings increases 10-25% negative returns for earnings decreases 46 Cambridge Business Publishers, 2013 47 Cambridge Business Publishers, 2013 48 Cambridge Business Publishers, 2013 49 Cambridge Business Publishers, 2013 50 Cambridge Business Publishers, 2013 51 Cambridge Business Publishers, 2013 52 Cambridge Business Publishers, 2013 53 Cambridge Business Publishers, 2013 54 Cambridge Business Publishers, 2013 55 Cambridge Business Publishers, 2013 56 Cambridge Business Publishers, 2013 57 Cambridge Business Publishers, 2013
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