Overview of Financial Reporting, Financial Statement Analysis, and Valuation – Chapter One, Exams of Financial Statement Analysis

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Chapter 1 - Overview of Financial

Reporting, Financial Statement

Analysis, and Valuation

BRIAN PETER

"What do unique products with few substitutes enhance? - CORRECT ANSWER Profitability" "Buyer Power relates to what 2 things? - CORRECT ANSWER 1- The relative NUMBER OF BUYERS AND SELLERS in the industry and the leverage buyers have with respect to price 2- Relates to buyers' PRICE SENSITIVITY and the ELASTICITY of demand. Are the buyers PRICE TAKERS or PRICE SETTERS?" "Supplier Power relates to... - CORRECT ANSWER Leverage in NEGOTIATING input prices from suppliers." "If an industry has a large number of potential buyers of inputs that are produced by relatively few suppliers, the suppliers will... - CORRECT ANSWER have greater power in setting prices and generating profits." "5 Economic Attributes Framework - CORRECT ANSWER 1- Demand 2- Supply 3- Manufacturing 4- Marketing 5- Investing & Financing" "4 Demand related questions to ask are: - CORRECT ANSWER 1- Are customers HIGHLY price-sensitive RELATIVELY insensitive? 2- Is demand GROWING RAPIDLY or is the industry RELATIVELY MATURE? 3- Does demand move WITH the economic cycle or is it insensitive to it? 4- Does demand VARY with the seasons or is it RELATIVELY STABLE throughout the year." "3 Supply related questions to ask are: - CORRECT ANSWER 1- Are supplier offering SIMILAR or UNIQUE products? 2- Are there HIGH BARRIERS to ENTRY? (Start up costs) 3- Are there HIGH BARRIERS to EXIT? Such as cleanup costs" "2 Manufacturing related questions to ask are: - CORRECT ANSWER 1- Is the manufacturing process CAPITAL intensive or LABOR intensive... or combination of both?

"A question to ask in Geographical Diversification is? - CORRECT ANSWER Is the firm targeting its products to its DOMESTIC market or integrating HORIZONTALLY across many countries?" What is the 6 step process in Financial Statement Analysis? - CORRECT ANSWER 1- Identify Economic Characteristics and Competitive Dynamics in the Industry 2- Identify Company Strategies 3- Assess the Quality of the Financial Statement 4- Analyze Profitability, Growth and Risk 5- Project Future Financial Statements 6- Value the Firm" "Economic characteristics and competitive dynamics influences...? - CORRECT ANSWER The strategies firms will employ" "Analysts should consider the economic characteristics and competitive dynamics while... - CORRECT ANSWER analyzing and forecasting financial statements" "3 Tools for Studying Industry Economics are: - CORRECT ANSWER 1 - Porter's Five Forces Classification Framework 2- Value Chain Analysis 3- Economic Attributes Framework" "2 Types of competition in Porter's Five Forces Classification Framework are: - CORRECT ANSWER 1- Horizontal Competition 2- Vertical Competiton" "3 Types of Horizontal Competition in Porter's Five Forces Classification Framework are: - CORRECT ANSWER 1- Rivalry among EXISTING Firms 2- Threat of NEW Entrants 3- Threat of SUBSITUTES" "2 Types of Vertical Competition in Porter's Five Forces Classification Framework are: - CORRECT ANSWER 1- BUYING Power

2- SUPPLING Power" "What is often the first order of competition? - CORRECT ANSWER Rivalry among EXISTING Firms" "Industries are characterized by what 2 types of rivalries among EXISTING firms? - CORRECT ANSWER 1- Concentrated Rivalry 2- Diffuse Rivalry" "The greater the industry concentration - CORRECT ANSWER the lower the competition between existing rivals and thus the more profitable the firms will be." "3 Threat of New Entrants Questions to ask are: - CORRECT ANSWER 1- How easily can new firms ENTER A MARKET? 2- Are there ENTRY BARRIERS? 3- Do the existing rivals have distinct COMPETITIVE ADVANTAGES making it difficult for other firms to enter and compete?" "What happens if existing rivals have distinct competitive advantages making it difficult for other firms to enter and compete? - CORRECT ANSWER Firms in the industry will likely generate HIGHER profits than if new entrants can enter the market easily." "2 Threat of Substitutes Questions to ask are: - CORRECT ANSWER 1- How easily can customers SWITCH to substitute products or services? 2- How LIKELY are they to switch?" "What happens to competition and profitability with close substitutes? - CORRECT ANSWER competition increases and profitability decreases" "A question to ask in Industry Diversification is? - CORRECT ANSWER Is the firm operating in a SINGLE INDUSTRY or diversifying across MULTIPLE INDUSTRIES?" "5 Financial Statements are: - CORRECT ANSWER 1- Income Statement 2- Balance Sheet 3- Statement of Cash Flows 4- Statement of Shareholders' Equity 5- Statement of Comprehensive Income"

"Under accrual basis of accounting, revenue is recognized when (2) - CORRECT ANSWER 1- it has completed ALL (or SUBSTANTIALLY all) of the revenue-generating process by delivering products or services to customers 2- It is reasonably certain that it has satisfied a liability or generated an asset that it can measure reliably" "Statement of Cash Flows assesses... - CORRECT ANSWER A firm's past ability to generate free cash flows and for predicting future free cash flows." "3 categories of statement of cash flows - CORRECT ANSWER 1- Operating Activities 2- Investing Activities 3- Financing Activities" "Transactions not directly involving cash are disclosed either in 1. ____________ OR 2. ___________ - CORRECT ANSWER 1- A supplementary schedule 2- A note to the statement of cash flows" "3 Tools to analyze profitability and risk: - CORRECT ANSWER 1- Common-size Financial Statements 2- Percentage change Financial Statements 3- Financial Statement Ratios" "2 Examples of Financial Statement Ratios involving PROFITABILITY: - CORRECT ANSWER 1- Earnings per Share 2- Return on Capital Employed" "2 Examples of Financial Statement Ratios involving RISK: - CORRECT ANSWER 1- Current Ratio 2- Debt to Equity Ratio" "Forecasts are the inputs into 1._________ and the quality of the decisions rests on 2. ____________ - CORRECT ANSWER 1- valuation models 2- the reliability of the forecasts" "Forecasted financial statements rely on... - CORRECT ANSWER Assumptions the analyst makes about the future"

"Amounts from the forecasted financial statements serve as.... - CORRECT ANSWER the basis for the valuation models" "6 Approaches to Value of the Firm - CORRECT ANSWER 1- Dividends 2- Earnings 3- Cash Flows 4- Market" "What 3 Value of the firm approaches give the same value? - CORRECT ANSWER 1- Dividends 2- Earnings 3- Cash Flows" "Stock Market Prices react with a high degree of EFFICIENCY to - CORRECT ANSWER to published information about a firm" "An implication of a highly efficient capital market is that - CORRECT ANSWER analysts and investors have more difficulty finding undervalued or overvalued securities" "4 Sources of Financial Statement Information - CORRECT ANSWER 1- Annual Report to Shareholders 2- Form 10K Annual Report 3- Form 10Q Quarterly Report 4- Prospectus or Registration Statement" ""Income Statement - CORRECT ANSWER A financial statement showing the revenue and expenses for a fiscal period." "Balance Sheet - CORRECT ANSWER A financial statement that reports assets, liabilities, and owner's equity on a specific date." "Statement of Cash - CORRECT ANSWER shows movement of cash from a beginning of a period to the end of a period, inflows and outflows of cash" "Statement of Shareholders' Equity - CORRECT ANSWER statement disclosing the source of changes in the shareholders' equity accounts."

2- For which the firm can PREDICT and MEASURE, the future benefits with a reasonable degree of precision and reliability." "Assets are categorized into what 4 groups? - CORRECT ANSWER 1- Current Assets 2- Investments 3- Property, Plant & Equipment 4- Intangibles" "Liabilities reflect... - CORRECT ANSWER managers' expectations of FUTURE SACRIFICES of resources to satisfy existing obligations." "Liabilities are categorized into what 2 groups: - CORRECT ANSWER 1- Current Liabilities 2- Noncurrent Liabilities" "Current liabilities includes obligations a firm expects to settle within... - CORRECT ANSWER ONE YEAR"