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business
financial statement analysis

Questions and Answers of Financial Statement Analysis

compare the presentation and disclosure of defi ned contribution and defi ned benefi t pension plans;
compare the disclosures relating to fi nance and operating leases;
determine the initial recognition, initial measurement, and subsequent measurement of fi nance leases;
distinguish between a fi nance lease and an operating lease from the perspectives of the lessor and the lessee;
explain motivations for leasing assets instead of purchasing them;
describe the fi nancial statement presentation of and disclosures relating to debt;
describe the role of debt covenants in protecting creditors;
explain the derecognition of debt;
describe the eff ective interest method and calculate interest expense, amortisation of bond discounts/premiums, and interest payments;
determine the initial recognition, initial measurement, and subsequent measurement of bonds;
Analyze and interpret the financial statement disclosures regarding property, plant, and equipment and intangible assets.
Describe the financial statement presentation of and disclosures relating to property, plant, and equipment and intangible assets.
Explain and evaluate the eff ects on financial statements and ratios of impairment, revaluation, and derecognition of property, plant, and equipment and intangible assets.
Describe the derecognition of property, plant, and equipment and intangible assets.
Describe the impairment of property, plant, and equipment and intangible assets.
Describe the revaluation model.
Calculate amortization expense.
Describe the diff erent amortization methods for intangible assets with finite lives and the eff ects of the choice of amortization method and the assumptions concerning useful life and residual
Calculate depreciation expense.
Describe the diff erent depreciation methods for property, plant, and equipment and the eff ects of the choice of depreciation method and the assumptions concerning useful life and residual value on
Explain and evaluate the eff ects on financial statements and ratios of capitalizing versus expensing costs in the period in which they are incurred.
Compare the financial reporting of the following classifications of intangible assets:purchased, internally developed, acquired in a business combination.
Distinguish between costs that are capitalized and costs that are expensed in the period in which they are incurred.
Analyze and compare the financial statements and ratios of companies, including those that use diff erent inventory valuation methods.
Explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information.
Describe the financial statement presentation of and disclosures relating to inventories.
Describe implications of valuing inventory at net realizable value for financial statements and ratios.
Convert a company’s reported financial statements from LIFO to FIFO for purposes of comparison.
Explain LIFO reserve and LIFO liquidation and their eff ects on financial statements and ratios.
Calculate and explain eff ects of inflation and deflation of inventory costs on the financial statements and ratios of companies that use diff erent inventory valuation methods (cost formulas or cost
Calculate and compare cost of sales, gross profit, and ending inventory using diff erent inventory valuation methods and using periodic and perpetual inventory systems.
Describe diff erent inventory valuation methods (cost formulas).
Distinguish between costs included in inventories and costs recognized as expenses in the period in which they are incurred.
describe how ratio analysis and other techniques can be used to model and forecast earnings.
explain the requirements for segment reporting, and calculate and interpret segment ratios;
calculate and interpret ratios used in equity analysis and credit analysis;
demonstrate the application of DuPont analysis of return on equity, and calculate and interpret eff ects of changes in its components;
describe relationships among ratios and evaluate a company using ratio analysis;
classify, calculate, and interpret activity, liquidity, solvency, profi tability, and valuation ratios;
describe tools and techniques used in fi nancial analysis, including their uses and limitations;
calculate and interpret free cash fl ow to the fi rm, free cash fl ow to equity, and performance and coverage cash fl ow ratios.
analyze and interpret both reported and common-size cash fl ow statements;
convert cash fl ows from the indirect to direct method;
describe the steps in the preparation of direct and indirect cash fl ow statements, including how cash fl ows can be computed using income statement and balance sheet data;
describe how the cash fl ow statement is linked to the income statement and the balance sheet;
distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method;
contrast cash fl ow statements prepared under International Financial Reporting Standards(IFRS) and US generally accepted accounting principles (US GAAP);
describe how non-cash investing and fi nancing activities are reported;
compare cash fl ows from operating, investing, and fi nancing activities and classify cash fl ow items as relating to one of those three categories given a description of the items;
calculate and interpret liquidity and solvency ratios.
convert balance sheets to common-size balance sheets and interpret common-size balance sheets;
describe the components of shareholders’ equity;
describe diff erent types of assets and liabilities and the measurement bases of each;
distinguish between current and non-current assets, and current and non-current liabilities;
describe alternative formats of balance sheet presentation;
describe uses and limitations of the balance sheet in fi nancial analysis;
describe the elements of the balance sheet: assets, liabilities, and equity;
describe other comprehensive income, and identify major types of items included in it.
describe, calculate, and interpret comprehensive income;
evaluate a company’s fi nancial performance using common-size income statements and fi nancial ratios based on the income statement;
convert income statements to common-size income statements;
distinguish between dilutive and antidilutive securities, and describe the implications of each for the earnings per share calculation;
describe how earnings per share is calculated and calculate and interpret a company’s earnings per share (both basic and diluted earnings per share) for both simple and complex capital structures;
distinguish between the operating and non-operating components of the income statement;
describe the fi nancial reporting treatment and analysis of non-recurring items (including discontinued operations, extraordinary items, unusual or infrequent items) and changes in accounting
describe general principles of expense recognition, specifi c expense recognition applications, and implications of expense recognition choices for fi nancial analysis;
calculate revenue given information that might infl uence the choice of revenue recognition method;
describe general principles of revenue recognition and accrual accounting, specifi c revenue recognition applications (including accounting for long-term contracts, installment sales, barter
describe the components of the income statement and alternative presentation formats of that statement;
analyze company disclosures of signifi cant accounting policies.
describe implications for fi nancial analysis of diff ering fi nancial reporting systems and the importance of monitoring developments in fi nancial reporting standards;
identify characteristics of a coherent fi nancial reporting framework and the barriers to creating such a framework;
compare key concepts of fi nancial reporting standards under IFRS and US generally accepted accounting principles (US GAAP) reporting systems;
describe general requirements for fi nancial statements under International Financial Reporting Standards (IFRS);
describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of fi nancial statements, required reporting elements, and
describe the status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of fi nancial reporting standards;
describe roles and desirable attributes of fi nancial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards, and describe the role of the
describe the objective of fi nancial statements and the importance of fi nancial reporting standards in security analysis and valuation;
describe the use of the results of the accounting process in security analysis.
describe the fl ow of information in an accounting system;
describe the relationships among the income statement, balance sheet, statement of cash fl ows, and statement of owners’ equity;
describe the need for accruals and other adjustments in preparing fi nancial statements;
describe the process of recording business transactions using an accounting system based on the accounting equation;
explain the accounting equation in its basic and expanded forms;
explain the relationship of fi nancial statement elements and accounts, and classify accounts into the fi nancial statement elements;
describe the steps in the fi nancial statement analysis framework.
identify and describe information sources that analysts use in fi nancial statement analysis besides annual fi nancial statements and supplementary information;
describe the objective of audits of fi nancial statements, the types of audit reports, and the importance of eff ective internal controls;
describe the importance of fi nancial statement notes and supplementary information—including disclosures of accounting policies, methods, and estimates—and management’s commentary;
describe the roles of the key fi nancial statements (statement of fi nancial position, statement of comprehensive income, statement of changes in equity, and statement of cash fl ows) in evaluating a
describe the roles of fi nancial reporting and fi nancial statement analysis;
E19.5. Tracking Credit Risk Measures: Toys "R" Us (Hard) Toys "R" Us, Inc., is the world's largest toy retailer, with sales of nearly $12 billion in 1999. It has been challenged in recent years,
E16.4. Inventory Accounting, P/B, and P/E Ratios: Ford Motor Company (Medium) Ford Motor Company uses the last in, first out (LIFO) method for most of its inventories in its Automotive Division. The
E9.10. Reformulation and Effective Tax Rates: Home Depot, Inc. (Medium) Home Depot is the largest home improvement retailer in the United States and one of the largest retailers Home Depot's income
E4.14. An Examination of Revenues: Microsoft (Medium) Microsoft Corp. reported $36.835 billion in revenues for fiscal year 2004. Accounts receivable, net of allowances, increased from $5.196 billion
Cl.9. Figure 1.2plots a price-to-value ratio (PIV) for the Dow Jones Industrial Average(DJIA) from 1979 to 1999. APN ratiois a metricthatcompares themarketprice(P)to anestimate of intrinsic
Chubb Corporation is a property andcasualty insurance holding company providing insurance through itssubsidiaries intheUnited States, Canada, Europe, andparts ofLatin America and Asia. Its
E13.19. Stock Repurchases: Expedia, Inc. (Medium) In June 2007, the Web travel firm Expedia, Inc., announced that it would buy back as much as 42 percent of its shares, with the repurchase financed
E13.18. Valuation of Operations: Nike, Inc., 2005 (Medium) The following summary numbers (in millions of dollars) were calculated from Nike's 2005 balance sheet; Net operating assets Net financial
E13.17. Residual Operating Income Valuation, Nike, Inc., 2004 (Medium) At the end of its 2004 fiscal year, the 263.1 million outstanding shares of Nike, Inc., traded at $75 each. The following

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