Corporate financial analysis

Explain the discrepancies between historical financial statement numbers

1. Financial statement analysis can be deceiving at times because it shows the place during a period of historical cost, and it also includes that effect of transactions. 2. A historical statement like these is not 100% true and helpful for future planning. A problem like this can be solved by inflation accounting. His discloses the effect of that change in price and the actual position. Additionally, the analysis which is based on just a year's statement cannot be very much use that is why comparative analysis, common size analysis, and trend analysis is needed. However, non-monetary facts like the quality of the product, the efficiency of labor, industrial relation, etc. which also have strong effects on financial positions are not revealed here. Now, quality control technique, as well as value, added analysis.

Explain the components of financial statements

1. Financial statements comprise of data which are its results. 2. These recorded facts have everything to do with business transactions. Including day to day activities. 3. There must be a convention which is adapted to facilitate the technique in use. 4. Analysis should be applied and necessary for correction and postulations. 5. Analysis shouldn't be taken as assumptions on personal judgment. 6. a. we engage in financial analysis is to use the past performance to judge the future with that eye of knowing the problematic areas. 7. There exists that relationship or bond between financial statement amounts. This is known as financial ratios, which is simply net income divided by sales.

3 objectives for investor analysis:

1. Interpretation of financial information- accessing statements and other financial data. Ratios are lead to fine-tuning or modification during the analysis process. 2. Making use of comparative data 3. Assessing the financial markets

i. financial statements could exhibit the true and fair view

1. Monetary and non-monetary items should be in the same unit, and they should be expressed quantitatively and qualitatively. 2. Businesses always assume continuity so that adjustment for outstanding, advanced, and accrual must be put into consideration and considered because published account is obviously prepared with respect to these changes.

'Risk

1. Risk is a condition in which there exists a quantifiable dispersion in the possible outcomes from any activity 2. uncertain future events which could affect the achievement of the organization's strategic, operational, and financial goals. 3. i. Risk is mostly divided into different categories for the managerial aspect like operational, financial, legal compliance, even information, and personnel. 4. Business or operational risk- activities that include components that entity coming from structure, systems and even people.

i. Collateral Value

1. That value of assets that are utilized as security for a loan or any other type of credit is what is considered as the collateral value. If there is no market value, the collateral value is always the best and ready option to make judgments

i. Common-size financial statements - the problem of scale and sizes.

1. The easiest and quickest solution to making this comparison is to divide all the financial statement numbers for that given year by the number of sales which have taken place that year. What you get from doing this is known as the common-size financial statements with all amounts for that given year. 1. Example: if you look at the table, you would notice that the sales in 2002 are higher in sales than in 2001, we can see that the gross profit is 86.3% of sales in 2001 can also be compared with 81.7% in 2002. Furthermore, the common-size information shows something that is not obvious in the raw numbers.

Describe some of the types of financial analysis

1. There are two major types of financial analysis; vertical analysis and the Horizontal analysis; 2. Financial analysis includes the selection, evaluation as well as interpretation of specific financial data alongside other relevant information to help in the investment and financial choices. 3. We have two major tools of financial analysis; ratio analysis and cash flow analysis. While the cash flow analysis permits the analyst to observe the firm's liquidity, and how the firm has been managing its operations, investments, and how it finances cash flows. 4. The ratio analysis of a firm's present and past performance gives that foundation needed for a forecast in the future. And financial forecasting is very useful in company valuation, credit evaluation, security evaluation as well as financial distress prediction. 5. Financial ratio analysis is used when you want to make an analysis of the economy while cash flow analysis is for industrial analysis 6. Economic Analysis- evaluate the company according to its performance in a specific environment. The following data is needed: Employment Production and Income Consumption Interest rates Inflation Investment activity Stock prices

Tax considerations

1. difference between financial accounting for just reporting purposes against tax accounting issues would result to tax management disputes which require you to legally minimize taxes in companies as well as other industries where the amount that is involved could be important enough to influence decisions on investments and operations with financing. 2. i. The tax determination is regulated by legal requisites of the current income tax code that requires improved principles of the income tax code, which most of the time needs amended 3. a. Tax adjustments: Most times, the amount of taxes that are remitted can be totally different from that which was recorded in the income statement and adjustment to this mistake is always made on the balance sheet to make the situation go right.

Failure to exhibit a true and fair view:

1. fail to show the quality of the facts and the features 2. Qualities like obsolesces of stock, the managerial ability, discipline, efficiency of the workers, and even the interrelation among workers. 3. the fixed assets are always recorded at a historical cost, not in the current market price. This means that the assets revealed in the balance sheet would not show true values. 4. the balance sheet would be a mix of different prices, and it would not be revealed according to the purchasing power of money at that stipulated date. 5. the financial statement fails to disclose non-monetary information, and it pays no attention to the price changes.

Common size balance sheet steps:

1. to common-size balance sheet which can be arranged by making use of the total assets in a bid to standardize those amounts instead of the total sales. a. List out those absolute figures in whatever currency (we would use $ here) relating to the two points of time, as shown below. b. Look for the change in absolute figures by removing the first year from the second year and show the change as increase or decrease by putting (+) or (—) up front. c. Lastly, you should calculate the percentage change and place it in the last column.

Comparison of year to year trends should entail

1. variation in accounting method 2. growth in allowance valuation 3. substantial proliferation in deferred revenue 4. if cash flow from operations is increasing or reducing at a rate that is different from the net income 5. you should also check the falling reserves for bad debts and accounts receivable

i. PE Ratio

=market value of the shares/net income

What are the other reports that provide support for the financial statements?

Furthermore, we have other reports which support these statements. Some of them are; the number of schedules, supplementary statements, footnotes, and some explanatory notes too.

Court case valuation

No one would want to do this, but this kind of valuation falls under different examples which include; bankruptcy, ownership disputes, divorce cases, copyright or intellectual property disputes, contractual disagreement/disputes and other dissenting shareholder issues.

we have three major objectives as regulated by specific professional standards and SEC regulations also

Profit determination-when revenue is earned, matching cost and expenses made value determination: i. the historical cost and even the conservative concept that makes use of the actual transaction evidence as that value gauge. ii. Done for accounts receivable or inventory that is uncollectible. iii. Furthermore, that growing prominence on making those recordings of the eventuality of all kind in the liability segment of the balance sheet would show if there is any negative bias in that value since only potential liabilities must be established not the potential profits.

Currency risk

That value of the financial instrument could ebb and flow due to the deviations existing in the rates of the foreign exchange.

Reproduction value

The amount needed to replace those existing fixed assets in kind is what is known as the reproduction value. You can consider this as a kind of like-for-like substitute cost of an asset, facility, or any machine.

Comprehensive Income Reporting

The comprehensive income reporting tries to measure the sum of the total of all operating and those financial events which have changed the value of theowner's interest in the enterprise. measured on that per-share basis needed to capture those effects of the dilution and other a eliminating the effect of the equity of transaction, and the owner would be indifferent due to the dividend payments and well as share buy-backs plus share issues at that market value.

There are several major categories of assets, or resources committed, some of them are

The current assets: These are items that would turn over if all things remain equal during the course of the business within a comparatively short period of time. Examples are; cash, accounts receivable, inventories, and marketable securities Next, on the list are the fixed assets. Provisions like land, buildings, equipment, mineral resources, vehicles, machinery, etc. which remain constant and are used repeatedly over that long period of time fall under this list i. Others: assets like deposits, patents, and several other intangibles which includes goodwill gotten from several acquisitions could also stand as working energy for the enterprise in terms of assets.

The interest rate risk

The interest rate changes is also a kind of risk which would surely influence the financial well-being of that business

Short Term Analysis

The short-term analysis is used to observe the current financial solvency, profitability, and concern of the business. Analysis like this would help the management and other bodies concerned to know if the firm would have enough funds to meet its short-term requirement. It also helps in making a working capital analysis.

Liquidity and funding risk

This are an entity that would cause that difficulty when assets are not realized, or funds are hard to raise due to the fact that financial commitments are not met

Valuation for transactions

Valuations for business purchase reasons, business sales, management by objective, recapitalizations, IPO, ESOPs, purchasing shares, projects and planning other ones, leverage buy out, M&A as well as a reverse merger, etc. are very good examples here.

Business valuation

When you're involved in any business valuation, you value the assets must be equal to the present value of the cash flows, reduced by that rate showing its inherent risk.

Valuation for planning sake

a. -Personal financial planning, Estate planning, strategic planning, M&A planning, etc. are all very good examples here.

How to perform Company Analysis?

a. Major finance news items in recent years. b. Financial statements, as well as data related disclosures. International investment Rank and market share in the industry, Major litigation (if there are any) c. The current state or stage of the company in its life cycle. The analyst must be able to determine if the company is in its development stage, maturity stage, or in its declining stage. d. The reaction of the company to commodity prices like oil etc. e. Development and research efforts. The contributions of the major product, divisions, and even subsidiaries of the company to the company's operation. f. Ratio analysis, Trend analysis, The common size statement of finance Industrial comparatives

Valuation for planning sake

a. Personal financial planning, Estate planning, strategic planning, M&A planning, etc. are all very good examples here.

We have three main approaches to valuation; discounted cash flow valuation, relative valuation, and contingent claim valuation.

a. Relative valuation - speculation or estimate of an asset by just checking the price of other comparable assets which are relative to that common change like cash flows, book value, earnings, etc. b. Valuation for transactions -Valuations for business purchase reasons, business sales, management by objective, recapitalizations, IPO, ESOPs, purchasing shares, projects and planning other ones, leverage buy out, M&A as well as a reverse merger, etc. are very good examples here. Court case Valuation - No one would want to do this, but this kind of valuation falls under different examples which include; bankruptcy, ownership disputes, divorce cases, copyright or intellectual property disputes, contractual disagreement/disputes and other dissenting shareholder issues.

Valuation methodology

a. The principle of substitution The principle of alternative, The technique of using the time value of money, The principle of expectation, The risk and return technique, Reasonableness and reconciliation of value technique

Valuation for compliances

a. This is done for Fair accounting as well as Tax issues.

the individual segments of a multibusiness

combined are more than the company's value as a corporate entity due to the inadequacies of the past management or even the current opportunities that were not observed earlier

Appraised Value

does not have a clearly defined market value, determined by a third individual agreed by both parties because a judgment that is not clouded by bias is needed.

Shareholder value

existing and new investments which would continue to exceed that cost of capital for the company. value like this would be reflected into that form of growing periodic total return for shareholders as assessed by the combination of dividends, capital profit or losses achieved which can be contrasted to that overall market returns or the returns gotten from the selected peer industries or firms.a. has so much tight relationship with cash flow trade-off and the return expectations, which are the fundamentals of the economic value.

Asset turnover

i. Asset turnover = Assets/sales 1. A high asset turnover ratio describes how efficient a company is in making use of its assets to make sales.

a. Funds gotten/Liabilities

i. Current liabilities: these are obligations to vendors, employees, lenders, and even tax authorities which are due within one year or even less. i. We also have long term liabilities. These are varieties of debt instruments which can be reimbursed within a year. Examples are loans, mortgages, loans, and bonds. i. Owners' or shareholders' equity: This accounts for the recorded net amount of funds provided by different classes of owners of the business as well as those accumulated earnings remaining in business after dividends have been settled.

a. Comparing Analyis and Interpretation

i. Horizontal analysis: this is when the financial statement of a particular year is interpreted and analyzed. It also includes the comparing of one year to another. Peculiarities, differences, and trends would be observed between both years. i. Vertical analysis: Financial statement of organization for a period can be analyzed; it is known as vertical analysis. This kind of analysis is very useful for inter-firm study and comparison.

Credit risk

i. If a party doesn't pay or fails to perform activities according to the terms of the contract, we would be facing

shareholder value creation

i. Investors now pay attention to those non-financial factors which affect the firm in their bid to assess the assets value and the total value of the corporations. ii. This concept has been mentioned several times in this book it is referred to as the shareholder value creation which associates itself with the basic ability of the assets or that claim to give a flow of after-tax cash flows to the entity. iii. They are very hard to predict due to the fact that you must be able to apply assumptions about any recovered cash from the liquidation or any ongoing value remaining at that point of analysis.

Quality ratio

i. QR= CA - INV/CL i. We do this because inventories most times are the smallest liquid of the current assets, and their liquidation value is not certain most of the time.

The balance sheet is also known as the statement of financial condition or statement of financial position

i. The balance sheet(s) is/are static. This means that they reflect the immediate condition on the date that they are prepared. We can also consider balance sheet to be cumulative since they signify the effects of all decisions and transactions that have happened since the beginning of the business and have also been accounted for up to the date it was prepared. ii. We shouldn't forget the common size balance sheet which can be prepared by making use of the total assets to make each amount standard instead of making use of the total sales table. The asset percentages here are good signs that there is a good asset mix in the firm.

Other comprehensive income may include the following components:

i. The changes that are happening during the revaluation surplus. ii. Actual gains and losses from those defined benefit plans and other acknowledged accordance with some employee benefits. iii. Profit or losses on remeasuring available for those sale financial assets are also iv. The profit and losses got from the translation of the financial statements involving foreign operation and other effects of foreign exchange rates. v. The influence of portion profit and losses on the hedging instruments present in the cash flow hedge.

There are several major categories of assets, or resources committed, on the balance sheet, some of them are

i. The current assets: These are items that would turn over if all things remain equal during the course of the business within a comparatively short period of time. Examples are; cash, accounts receivable, inventories, and marketable securities. ii. i. Next, on the list are the fixed assets. Provisions like land, buildings, equipment, mineral resources, vehicles, machinery, etc. which remain constant and are used repeatedly over that long period of time fall under this list. iii.i. Others: assets like deposits, patents, and several other intangibles which includes goodwill gotten from several acquisitions could also stand as working energy for the enterprise in terms of assets.

Provide a breakdown of the various types of financial statement and explain their overall use:

i. The income statement shows the financial result and profits of a business. ii. The statement of retained earnings which shows the specific money set aside for future use or for a project and the allocation of earnings. iii. The balance sheet shows that the financial position of the business at that point in time, and it represents the proprietor's fund as well as liabilities to outsiders. The balance sheet also shows investment present in all assets. iv. Lastly, the statement of changes in that financial spot which shows the progress of the working capital or the cash. It also shows us the financial position so that we can have an ideal understanding of the business state. v. They help the management deal with (i) the state of investments in the business as well as the (i) result achieved by the business during that specific period of review.

a. an entity may decide to show other components of other comprehensive income which may include;

i. The net of related tax effects ii. Or before the tax effects affect the amount displayed for that aggregate quantity of revenue tax involving these components.

The differences between the traditional and modern approach of financial analysis:

i. The traditional approach is all about the subject matter of the financial statement analysis placed in a different branch of study. ii. While the modern approach to financial statement analysis is that broad-based line of attack that displays a theoretical and analytic framework for internal financial decision making. iii. Modern is more detailed and specific: Strong connection between financial analysis, economic theories, financial models. iv. Traditional: utilizes ratio's , percentages, and averages.

Michael Porter listed five factors which you can use to analyze the above advantages

i. Threat from new entrants: ii. Bargaining Power of the buyers: iii. Bargaining power of the suppliers: iv. The threats of substitutes: v. Rivalry among competitors:

Debt Ratio.

i. Total liabilities/total assets If you compare the number of liabilities with that of the assets, you would know to what extent a company has borrowed money to settle the shareholder's investment and to also increase the company size.

Liquidation value

i. When a company or firm needs to liquidate part or even all of its assets or claims, a value would be apportioned to it at that moment. That is the liquidation value. i. It can be used sometimes to value assets of unproved organization or businesses as the actual basis for analysis rather than estimating the highly unpredictable cash flow patterns when there is need to test the creditworthiness of that business.

Current ratio

i. is calculated as CA/CL, ca is current assets and cl are current liabilities

Fair and accurate presentation incorporates

i. material facts, unusual and exceptional items should be disclosed, Current assets should be valued at the cost market price while fixed assets should be valued at the cost less depreciation,

Mitigate risk through

i. probability; scenario planning; simulations which would entail the Monte Carlo spreadsheet simulation; real option modelling; decision trees; sensitivity analysis; risk drawing; statistical implication; SWOT or PEST analysis as well as root cause analysis, profit/risk implication analysis and even the human reliability analysis.

the industry analysis

i. selected companies having similar groupings would have that compiled ratios which are generally available on-line database which would be measured against the attributes of other companies that would be studied between that

Ratio's include

i. the leverage ratios, liquidity ratios, repayment capacity ratio, efficiency ratio, and lastly, the profitability ratios. i. Debt ratio=total liabilities/total assets

Factors that affect market value

i. they can be affected by several factors which include; the heat of a takeover battle, shift in economic and political conditions of a county, significant industry developments, etc. furthermore that volume of trading in the assets or even security would be affected by the value that is placed by the buyers or sellers.

Market value

is that value of any asset or any collection of assets when it is traded in a very organized market or bargained between several private parties in a well-defined transaction without any constraint or compulsion.

Trend analysis

makes use of different adjusted data, to look for and make all of those analyses which are needed for important changes in magnitudes and ratio relation over time.

Return on sales

net income/sales