Page 71 - Financial Statement Analysis

sub79433_ch01.qxd 4/7/08 11:21 AM Page 48

48 Financial Statement Analysis

1–13. Explain why financial statements are important to the decision-making process in financial analysis. Also,
identify and discuss some of their limitations for analysis purposes.
1–14. Identify at least seven additional sources of financial reporting information (beyond financial statements)
that are useful for analysis.
1–15. Identify and discuss at least two areas of financial analysis.
1–16. Identify and describe at least four categories of financial analysis tools.
1–17. Comparative analysis is an important tool in financial analysis.
a. Explain the usefulness of comparative financial statement analysis.
b. Describe how financial statement comparisons are effectively made.
c. Discuss the necessary precautions an analyst should take in performing comparative analysis.
1–18. Is past trend a good predictor of future trend? Justify your response.
1–19. Compare the “absolute amount of change” with the percent change as an indicator of change. Which is
better for analysis?
1–20. Identify conditions that prevent computation of a valid percent change. Provide an example.
1–21. Describe criteria in selecting a base year for index-number trend analysis.
1–22. Explain what useful information is derived from index-number trend analysis.
1–23. Common-size analysis is an important tool in financial analysis.
a. Describe a common-size financial statement. Explain how one is prepared.
b. Explain what a common-size financial statement report communicates about a company.
1–24. What is a necessary condition for usefulness of a ratio of financial numbers? Explain.
1–25. Identify and describe limitations of ratio analysis.
1–26. Ratio analysis is an important tool in financial analysis. Identify at least four ratios using:
a. Balance sheet data exclusively.
b. Income statement data exclusively.
c. Both balance sheet and income statement data.
1–27. Identify four specialized financial analysis tools.
1–28. What is meant by “time value of money”? Explain the role of this concept in valuation.
1–29. Explain the claim: While we theoretically use the effective interest rate to compute a bond’s present value,
in practice it is the other way around.
1–30. What is amiss with the claim: The value of a stock is the discounted value of expected future cash flows?
1–31. Identify and describe a technique to compute equity value only using accounting variables.
1–32. Explain how the efficient market hypothesis (EMH) depicts the reaction of market prices to financial and
other data.
1–33. Discuss implications of the efficient market hypothesis (EMH) for financial statement analysis.

EXERCISES
EXERCISE 1–1 The preparation and analysis of comparative balance sheets and income statements are
Discretion in commonly applied tools of financial statement analysis and interpretation.
Comparative Financial Required:
Statement Analysis
a. Discuss the inherent limitations of analyzing and interpreting financial statements for a single year. Include in
your discussion the extent that these limitations are overcome by use of comparative financial statements com-
puted over more than one year.
b. A year-to-year analysis of comparative balance sheets and income statements is a useful analysis tool. Still,
without proper care, such analysis can be misleading. Discuss factors or conditions that contribute to such a
possibility. How can additional information and supplementary data (beyond financial statements) help prevent
this possibility?