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Chapter One | Overview of Financial Statement Analysis 47

Chapters 3–6, emphasizes accounting analysis. It describes accounting analysis for fi-
nancing, investing, and operating activities. Part III, covering Chapters 7–11, focuses
on financial analysis. Chapter 7 explains the analysis of cash flows, while Chapter 8 de-
scribes profitability analysis. Chapter 9 discusses forecasting and pro forma analysis,
and Chapters 10–11 highlight two major applications of financial statement analysis—
credit analysis and equity analysis.
The book concludes with a comprehensive case analysis of the financial statements
of Campbell Soup Company. We apply and interpret many of the analysis techniques
described in the book using this case. Appendix A reproduces annual report excerpts
from two companies that are often referred to in the book: Colgate and Campbell Soup.
Throughout this book, the relation of new material to topics covered in earlier chapters
is described to reinforce how the material fits together in an integrated structure for
financial statement analysis.

GUIDANCE ANSWERS TO ANALYSIS VIEWPOINTS
CREDITOR A creditor (or banker) is con- more likely that Colgate will be able to meet
cerned about Colgate’s ability to satisfy its loan interest and principal payments on its debt.
obligations. Interest and principal payments
must be paid, whereas dividends to owners INVESTOR As a potential investor, your
(shareholders) are optional. Colgate has $5.48 review of financial statements focuses on
of creditor financing for every dollar of equity Colgate’s ability to create and sustain net in-
financing. Moreover, more than half of the come. Each of the statements is important in
creditor financing is interest bearing debt. this review. The income statement is espe-
Prima facie, therefore there is some concern cially important as it reveals management’s
about Colgate’s ability to pay interest and current and past success in creating and sus-
principal. However, Colgate’s superior prof- taining income. The cash flow statement is
itability suggests that such a concern is un- important in assessing management’s ability
warranted: Colgate’s earnings before interest to meet cash payments and the company’s
and taxes are $2.15 billion, which is more than cash availability. The balance sheet shows the
13 times its interest bill of $158 million. Addi- asset base from which future income is gener-
tionally Colgate’s income over the past ten ated, and it reports on liabilities and their
years has been very stable, which makes it due dates.

QUESTIONS
1–1. Describe business analysis and identify its objectives.
1–2. Explain the claim: Financial statement analysis is an integral part of business analysis.
1–3. Describe the different types of business analysis. Identify the category of users of financial statements
that applies to each different type of business analysis.
1–4. What are the main differences between credit analysis and equity analysis? How do these impact the
financial statement information that is important for each type of analysis?
1–5. What is fundamental analysis? What is its main objective?
1–6. What are the various component processes in business analysis? Explain with reference to equity analysis.
1–7. Describe the importance of accounting analysis for financial analysis.
1–8. Describe financial statement analysis and identify its objectives.
1–9. Identify at least five different internal and external users of financial statements.
1–10. Identify and discuss the four major activities of a business enterprise.
1–11. Explain how financial statements reflect the business activities of a company.
1–12. Identify and discuss the four primary financial statements of a business.