Financial

Statement
Analysis

Course Structure
Part One: Introduction (Chapter 1)

Part Two: 4 steps of analysis (Chapter 2-8)

Part Three: Application in 4 different

decision contexts:
1.security analysis,
2.credit evaluation,
3.merger and acquisition,
4.corporate communication strategy

Chapter 1:
Framework for Business Analysis and
Valuation Using Financial Statements

Key Concepts in Chapter 1

Financial statements are an important source of
information to the capital markets and business
analysts.

Analyzing financial statements addresses a

number of issues of interest to external
stakeholders and company insiders.

The Role of Financial Reporting in

Capital Markets
Financial reporting provide much-needed
information to capital market participants
Financial intermediaries depend upon the information
in financial statements to evaluate investment
opportunities.
Information intermediaries assure the quality of
financial statement representations.
Relevant and reliable financial information is essential
for the functioning of capital markets.

How Capital Markets Function

From Business Activities to

Financial Statements
Financial statements measure and summarize
the economic consequences of business
activities.
Accounting systems facilitate information quality.
The role of accrual accounting.
The need for generally accepted accounting principles
(GAAP).
Auditing and the quality of financial information.

From
Business
Activities to
Financial
Statements

Financial Statements and Business Analysis

Business intermediaries use financial
statements to accomplish four key objectives:
Business strategy analysis
Accounting analysis
Financial analysis
Prospective analysis

Four Steps of
Financial
Statement
Analysis

Concluding Comments
Financial statements are source of widely
available data on publicly traded corporations.
Accrual accounting attempts to accurately reflect
expectations of economic performance, but
requires careful analysis.
This chapter has outlined a useful framework for
business analysis using financial statements.

Case Discussion:The 2008 Financial Crisis

What is the intended role of each of the following institutions and

intermediaries for the effective functioning of capital markets?

The regulators
The companies and their management teams
The financial market (the exchange)
The information intermediaries
The financial intermediaries
The investors

How does each of these parties use the financial statements?

Are their incentive aligned properly with their intended role? Whose
incentives are most misaligned?

Who, if anyone, was primarily responsible for this subprime mortgage crisis?

What are the costs of such a financial crisis? As a future business

professional, what lessons do you learn from the crisis?

Case Discussion:The 2008 Financial Crisis