Working with Financial Statements

Working with Financial Statements

1. Using Financial Statement Information

   • Why evaluate Financial Statements?
     • Internal Uses
       • The most important is performance evaluation
       • Planning for the future
         • Historical financial statement information is useful for generating projections about the future and for checking the realism of assumptions made in those projections
     • External Uses
       • Are useful to parties outside the firm, including shor-term and long-term creditors and potencial investors
       • Evaluate suppliers, and suppliers would review our statements before deciding to extend credit to us
       • Assesing a firm's overall creditworthiness
       • Financial statement information wold be essential in identifying potential targets and deciding what to offer
   • Choosing a benchmark
     • Time Trend Analysis
       • History
         • We might wonder if the liquidity position of the firm has deteriorated. It could be that the firm has made changes that allow it more efficiently use its current assets, the nature of the firm's business has changed, or bussines practices have change
     • Peer Group Analysis
       • Identify firms similars in the sense that they compete in the same markets, have similars assets, and operate in similar ways
       • One common way of identifying potencial peers is based on SIC codes
         • Standard Industrial Classification (SIC) code: A.U.S. government code use to classify a firm by its type of business operations
           • The North American Industry Classification System (NAICS) is intended to replace the older SIC codes
   • Problems with Financial Statements Analysis
     • The basic problem with financial statement analysis is that there is no underlying theory to help us identify wich quantities to look and to guide us in establishing benchmark
     • One particularly severe problem is that firms are comglomerates, owning more or less unrelated lines of business
     • Another problem is that major competitors and natural peer group members in an industry may be scattered around the globe
       • The existence of different standards and producers make it difficult to compare financial statements across national borders
     • Different firms use different accounting procedures. This makes it difficult to compare statements
     • Different firms end their fiscal years at different times. This can lead to difficulties in comparing balance sheets because of the fluctustions in accounts during the year