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Summary Investment Decisions
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This summary helps you understand the theory and tactics of Investment Decisions
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Investment DecisionsWeek 1 & 2
Chapter 3: Financial Statement and Ratio Analysis
The Stockholders’ Report
- General Accepted Accounting Principles (GAAP). Authorized by the FASB.
- Sarbanes-Oxley Act of 2002. Established by the PCAOB.
- The Letter to Stockholders = the first element of the annual stockholders’ report and
the primary communication from management.
- The Four Key Financial Statements:
Income Statement = provides a financial summary of the firm’s operating results
during a specified period.
Balance sheet = a summary of the firm’s financial position given at a point in a
time.
Statement of Retained Earnings = reconciles the net income during a given year,
and any cash dividend paid, with the change in retained earnings between the
start and the end of that year.
Statement of Cash Flows = provides a summary of the firm’s operating,
investment, and financing cash flows and reconciles them with changes in its
cash and marketable securities during that period.
- Notes to the Financial Statements = explanatory notes keyed to relevant accounts in
the statements: they provide detailed information on the accounting policies,
procedures, calculations, and transactions underlying entries in the statements.
, Is net income sufficient to determine whether a company is financially healthy? NO.
How much cash is present in the company right now?
Insolvent = when a company has insufficient cash to pay its maturing obligations ›
bankruptcy.
Statement of Cash Flows = a summary of the firm’s Operating, Investment, and Financing
cash flows. It illustrates the changes in cash and marketable securities. It ties together the
income statement and previous and current balance sheets.
Interested parties in financial ratios are shareholders, creditors and management.
Types of ratio comparisons:
- Cross-sectional analysis = comparison of different firms’ financial ratios at the same
point in time, involves comparing the firm’s ratios with those of other firms in its
industry or with industry.
- Benchmarking = a type of cross-sectional analysis in which the firm’s ratio values are
compared with those of a key competitor or with a group of competitors that it wishes
to emulate.
- Time-series analysis = evaluation of the firm’s financial performance over time using
financial ratio analysis.
- Combined analysis = combines cross-sectional and time-series analyses.
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