Chapter 1 - Framework for Analysis and Valuation
Expenses (or costs), Revenues (or sales)
Input markets generate the most ________________, such as inventory, salaries, materials, and logistics, while output markets generate __________________ to customers
Disclaimer of opinion
Issued when the auditors are unable to issue an opinion for some reason, such as a scope limitation.
Operating activities
_____________________ activities use company resources to produce, promote, and sell its products and services.
Treasury Stock
_______________________ is the cost of the shares that a company has repurchased but not reissued. (this decreases equity when shares are repurchased)
Strategic (or business) plan
A company's ____________________ reflects how it plans to achieve its goals and objectives.
Value-chain model
A way to formalize "knowing the business" is through the use of the ______________________, which seeks to identify and understand the activities that create a company's profit margin
audit report
An _______________________ is a written opinion on the financial statements prepared by the independent auditor.
Internal search for strengths and weaknesses, and external search of opportunities and threats
Explain a SWOT Analysis
Beginning AOCI + OCI = Ending AOCI
Formula for ending AOCI
Beginning common stock + issuances - repurchases = ending common stock
Formula for ending common stock
Beginning Equity + Changes in Equity = Ending Equity
Formula for ending equity
Due to timing differences between when revenue and expense items are recognized on the income statement and when cash is received and paid
Generally, a company's net cash flow for a period does NOT equal its net income for the period. Why?
Securities and Exchange Commission (SEC)
In the US, publicly traded firms must file financial accounting info with the _____________________________.
Qualified audit opinion
One in which there is some scope limitation or exception to accounting standards. Exceptions are described in the audit report with additional explanatory paragraphs so that the analyst can determine the importance of the exception.
Net Income / sales
Profitability, or profit margin, formula
Management Discussion and Analysis (MD&A)
Provides management with an opportunity to explain its objectives and its strategies for achieving those objectives. In this section, management must highlight any favorable or unfavorable trends and identify significant events and uncertainties that affect the company's liquidity, capital resources, and results of operations.
Financial Reporting
Providing financial information about an entity to enable users to make decisions
Net income / average stockholder's equity
Return on Equity Formula
SEC, Financial accounting standards board (FASB)
The 1934 Securities Act gave the __________ the authority to set accounting reporting standards. However, this government appointed body has delegated the task of setting accounting standards to the ____________________________________, a private sector organization
Regulation FD (Reg FD)
The SEC adopted _________________ to curb the practice of selective disclosure by public companies to certain shareholders and financial analysts.
Statement of stockholder's equity
The ________________________ reports on changes in key types of equity over a period of time.
The International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS)
The _____________________________ oversees the development of accounting standards for a vast number of countries outside the U.S. and they require use of ______________________________.
Sarbanes - Oxley Act
The goal of this act was to restore credibility and investor confidence in the financial reporting process
Endorsement Method
Under the _________________________________, FASB would remain the US standard setter and endorse new IFRS into the US financial reporting system.
1. Understanding the Business Environment and Accounting Information (Where does the firm operate?) 2. Adjusting and Assessing Financial Info and Accounting Info (Where is the firm currently) 3. Forecasting Financial Info (Where is the firm going?) 4. Using Info for valuation (what is the firm worth?)
What are the 4 key steps in financial statement analysis and valuation?
1. Firm infrastructure 2. HR management 3. Technology/product development 4. Procurement
What are the 4 support activities in the value-chain model?
1. Industry Competition 2. Buyer Power 3. Supplier power 4. product substitutions 5. threat of entry
What are the 5 forces that confront a company and determine its intensity in the value-chain model?
1. Inbound logistics 2. operations 3. outbound logistics 4. marketing and sales 5. Servicing
What are the 5 primary activities in the value-chain model?
1. Managers and employees 2. Investment analysts and info intermediaries 3. Creditors and suppliers 4. Shareholders and directors 5. customers and strategic partners 6. regulators and tax agencies 7. Voters and their representatives
What are the 7 classes of users that demand financial accounting information?
1. Life cycle 2. Outputs 3. Buyers 4. Inputs 5. Competition 6. Financing 7. Labor 8. Governance 9. Risk
What are the 9 broader business environment factors to consider when analyzing a company's financial statements?
Facilitates debt and equity financing through lower interest rates and higher stock price. Also enables firms to attracts suppliers, customers and employees. ***Company's performance in these markets depends on success with its business activities AND the market's awareness of that success***
What are the benefits of Disclosure? (releasing info on financial statements about firm)
-Preparation and dissemination costs (unavoidable) -competitive disadvantages (provides info to competitors) -litigation potential (can create expectations that are not met) -political costs (excess profits can invite scrutiny)
What are the costs of disclosure?
1. Unqualified audit opinion 2. Qualified audit opinion 3. Adverse audit opinion 4. Disclaimer of opinion
What are the four types of audit reports?
1. MD&A (Mgmt Discussion and Analysis) 2. Independent Auditor Report 3. Financial statement footnotes 4. Regulatory filings, including proxy statements and other SEC filings
What are the other 4 ways besides financial statements that a company communicated various financial info?
Contributed Capital and Retained Earnings
What are the two basic components of owner's equity?
1. The quality of our analysis already performed in steps 1 and 2 in understanding the business environment and adjusting and assessing financial info 2. On our assumptions being realistic and achievable
What are the two factors affecting quality of financial forecasts?
Form 10-K and Form 10-Q
What are the two main compulsory SEC filings?
Owner claims (shareholder's) and non-owner claims (creditors)
What are the two types of claims on a company?
through shareholders, equity (owner financing) and through creditors/suppliers, liabilities (non-owner financing)
What are the two ways in which a company can finance its assets?
Effective Analysis of market demand and supply
What does a business plan depend on?
Items that make the report more attractive, like colored photos, charts, letter from CEO, etc. (can be misleading)
What is "PR Fluff"?
Ending Retained Earnings = Beginning Retained Earnings + Net Income for the period - Dividends for the period
What is the formula for Ending Retained Earnings?
Revenues - COGS = Gross Profit - Expenses = Net income (loss)
What is the income statement format formula?
Net income is component of operating cash flow
What links the Income Statement and Statement of Cash Flows?
Change in cash on balance sheet reflects the cash inflows and outflows
What links the Statement of cash flows and the balance sheet?
Retained Earnings (Beg RE + NI - Dividends = End RE)
What links the income statement and the balance sheet?
Asset Turnover
Which of the ratios is not calculated as a percentage, but a decimal?
Borrowed Money (nonowners) entails a legal obligation to repay amounts owed, yet equity financing (owner) entails no such legal obligation
Why are the two financing sources (owner and nonowner) distinguished from eachother?
Calender-year
__________________ companies have reporting periods beginning on January 1 and ending on December 31.
Forecasting
_________________________ is the step where we proceed from our understanding of the company's current environment (step 1) and what has occurred with the company (step 2) to a prediction of what will occur next.
General-Purpose financial statements
financial statements aimed to satisfy informational needs of a generic user
Financial Statement Analysis and Valuation
is the joint process of scrutinizing a company's financial statements and valuing its equity and debt
Valuation
is the process of drawing on the results of financial statement analysis to estimate a company's worth
Financial Statement Analysis
is the process of extracting information from financial statements to better understand a company's current and future performance and financial condition
Form 10-Q
the unaudited quarterly report, which includes summary versions of the four financial statements and limited additional disclosures [must be filed within 40(45) days of the year end for larger (smaller) companies]
Operating, investing, and financing
three categories on the statement of cash flows
Noncontrolling interest
*One classification on statement of stockholder's equity* the equity of outside stockholders
Statement of financial position
A balance sheet is also called what?
Equity, as opposed to debt
A firm that has a lot of volatility is going to want to finance more through ______________, as opposed to _____________.
accounting, or fiscal, year
A one-year, or annual, reporting period is common and is called the _____________________.
No
Are financial statements prepared under IFRS substantially different from those prepared under U.S. GAAP?
Generally accepted accounting principles (GAAP)
Financial statements are prepared according to what?
Companies spend money on activities such as new technologies, promotion, and human development to erect barriers of entry and economies of scale.
How do companies attempt to mitigate the threat of entry?
Adverse audit opinion
Issued when an auditor determines that the financial statements materially depart from accounting standards and are not fairly presented.
Net income / average assets
Return on assets formula
Investing Equals Financing (same concept as accounting equation)
Since all financing must be invested in something, we obtain the following basic relation:
Company's business model (their industries)
The relative proportion of short-term and long-term assets is largely determined by what?
Claims on the company
The value of the company equals what?
Proxy Statement
This is used to obtain shareholder votes and contains background info about directors, director's compensation, executive compensation, etc. etc.
Retained Earnings
*One classification on statement of stockholder's equity* net income over the life of the company minus all dividends ever paid
Contributed Capital
*One classification on statement of stockholder's equity* represents assets the company received from issuing stock to stockholders
Unqualified audit opinion
"Clean" opinion. States that the financial statements "fairly presented" in accordance with applicable accounting standards. This opinion is the one that we like to see in a financial report.
Sales / average assets
Productivity, or asset turnover, formula
The benefits and costs of disclosure
The quantity and quality of accounting information that companies supply are determined by manager's assessment of what?
Statement of Cash flows
reports the change in a company's cash balance over a period of time
Form 20-F
submitted by "foreign private issuers" to reconicile accounting statements to US GAAP standards.
Form 10-K/A or 10-Q/A
the "A" refers to an amended previously filed Form 10-K or 10-Q, respectively, usually due to an accounting change or error correction
Form 10-K
the audited annual report, which provides a comprehensive overview of the company for the past year; includes the 4 financial statements with explanatory notes; the management's discussion and analysis of financial results; an Auditor's report; high and low stock prices; and a five-year summary of key financial data [must be filed within 60(90) days of the year end for larger (smaller) companies]
Accumulated Other Comprehensive Income (AOCI)
For now, view _______________________________ as income that has not been reflected in the income statement and is therefore excluded from retained earnings
Informative but biased
What adjectives explain the MD&A portion of financial statements?
Investing, Financing and Operating
What are the 3 types of activities for a business?
