FMGT 75A FINANCIAL ANALYSIS AND REPORTING (MIDTERM SAMPLE TEST)

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BUSINESS ANALYSIS

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BUSINESS ANALYSIS

process of evaluating a company's economic prospects and risks. This includes analyzing a company's business environment, its strategies, and its financial position and performance.

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FINANCIAL STATEMENT ANALYSIS

application of analytical tools and techniques to general-purpose financial statements and related data to derive estimates and inferences useful in business analysis. It reduces reliance on hunches, guesses, and intuition for business decisions.

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CREDIT ANALYSIS

evaluation of the creditworthiness of a company. Creditworthiness is the ability of a company to honor its credit obligations. Credit analysis focuses on downside risk instead of upside potential.

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LIQUIDITY

company's ability to raise cash in the short term to meet its obligations. Liquidity depends on a company's cash flows and the makeup of its current assets and current liabilities.

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SOLVENCY

company's long-run viability and ability to pay long-term obligations. It depends on both a company's long-term profitability and its capital (financing) structure.

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CREDITORS

lend funds to a company in return for a promise of repayment with interest.

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TRADE CREDITORS

deliver goods or services to a company and expect payment within a reasonable period, often determined by industry norms.

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NONTRADE CREDITORS

provide financing to a company in return for a promise, usually in writing, of repayment with interest (explicit or implicit) on specific future dates.

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EQUITY ANALYSIS

process of analyzing sectors and companies, to give advice to professional fund managers and private clients on which shares to buy.

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TECHNICAL ANALYSIS

searches for patterns in the price or volume history of a stock to predict future price movements.

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FUNDAMENTAL ANALYSIS

process of determining the value of a company by analyzing and interpreting key factors for the economy, the industry, and the company.

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INTRINSIC VALUE

value of a company (or its stock) determined through fundamental analysis without reference to its market value (or stock price).

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EQUITY INVESTORS

provide funds to a company in return for the risks and rewards of ownership.

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INDUSTRY ANALYSIS

usual first step since the prospects and structure of its industries largely drive a company's profitability.

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STRATEGY ANALYSIS

evaluation of both a company's business decisions and its success at establishing a competitive advantage

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ACCOUNTING ANALYSIS

process of evaluating the extent to which a company's accounting reflects economic reality. This is done by studying a company's transactions and events, assessing the effects of its accounting policies on financial statements, and adjusting the statements to both better reflect the underlying economics and make them more amenable to analysis.

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COMPARABILITY PROBLEMS

arise when different companies adopt different accounting for similar transactions or events.

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ACCOUNTING DISTORTIONS

deviations of accounting information from the underlying economics.

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ACCOUNTING RISK

uncertainty in financial statement analysis due to accounting distortions.

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FINANCIAL ANALYSIS

use of financial statements to analyze a company's financial position and performance, and to assess future financial performance.

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PROFITABILITY ANALYSIS

focuses on a company's sources and levels of profits and involves identifying and measuring the impact of various profitability drivers.

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RISK ANALYSIS

evaluation of a company's ability to meet its commitments.

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ANALYSIS OF CASH FLOWS

the evaluation of sources and uses of funds.

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PROSPECTIVE ANALYSIS

forecasting of future payoffs—typically earnings, cash flows, or both. This analysis draws on accounting analysis, financial analysis, and business environment and strategy analysis. The output of prospective analysis is a set of expected future payoffs used to estimate the company's value.

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VALUATION

refers to the The process of converting forecasts of future payoffs into an estimate of company value. main objective of many types of business analysis.

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PLANNING ACTIVITIES

to implement specific goals and objectives. company's goals and objectives are captured in a business plan that describes the company's purpose, strategy, and tactics for its activities.

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FINANCING ACTIVITIES

refer to methods that companies use to raise the money to pay for these needs.

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EQUITY INVESTORS

provide financing in a desire for a return on their investment, after considering both expected return and risk.

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RETURN

equity investor's share of company earnings in the form of either earnings distribution or earnings reinvestment.

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EARNINGS DISTRIBUTION

payment of dividends to shareholders.

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DIVIDENDS

can be paid directly in the form of cash or stock dividend, or indirectly through stock repurchases.

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DIVIDENDS PAYOUT

refers to the proportion of earnings distributed.

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EARNINGS REINVESTMENT

refers to retaining earnings within the company for use in its business.

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EARNINGS RETENTION RATIO

reflecting the proportion of earnings retained.

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PRIVATE OFFERINGS

usually involve selling shares to one or more individuals or organizations.

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PUBLIC OFFERINGS

involve selling shares to the public.

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DEBT CREDITORS

who directly lend money to the company.

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OPERATING CREDITORS

to whom the company owes money as part of its operations.

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CREDITOR FINANCING

an agreement or contract that requires repayment of the loan with interest at specific dates.

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INVESTING ACTIVITIES

Refer to a company's acquisition and maintenance of investments for purposes of selling products and providing services, and for the purpose of investing excess cash.

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OPERATING ACTIVITIES

Represent the "carrying out" of the business plan given its financing and investing activities. company's primary source of earnings.

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ASSETS

investments that are expected to generate future earnings through operating activities.

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LIABILITIES

funding from creditors and represent obligations of a company or, alternatively, claims of creditors on assets.

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CURRENT ASSETS

expected to be converted to cash or used in operations within one year or the operating cycle, whichever is longer.

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CURRENT LIABILITIES

obligations the company is expected to settle within one year or the operating cycle, whichever is longer.

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WORKING CAPITAL

difference between current assets and current liabilities.

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INCOME STATEMENT

measures a company's financial performance over a period of time, typically a year or a quarter. It is a financial representation of the operating activities of a company during the period.

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NET INCOME

measure the amount that the company earned during the period.

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GROSS PROFIT

difference between sales and cost of goods sold and measures the ability of a company to cover its product costs.

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OPERATING EARNINGS

does not have a fixed definition but refers to the difference between sales revenues and all operating expenses.

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PAR VALUE

minimum legal capital that must be maintained inside the company in order to provide some measure of protection to the creditors.

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RETAINED EARNINGS

amount of net income left over for the business after it has paid out dividends to its shareholders.

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UNREALIZED GAIN

loss occurs when an investment, pension plan, or hedging transaction has appreciated or depreciated in fair value, but a sale transaction has not yet occurred for the gain or loss to be realized.

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TREASURY STOCK

Stock already issued but subsequently reacquired by the corporation and held for possible future reissuance or retirement

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COMPARATIVE FINANCIAL STATEMENT ANALYSIS

conducted by reviewing consecutive balance sheets, income statements, or statements of cash flows from period to period. (TREND)

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COMMON-SIZE FINANCIAL STATEMENT ANALYSIS

This procedure also is called vertical analysis given the up-down (or down-up) evaluation of accounts. It is useful in understanding the internal makeup of financial statements.

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RATIO ANALYSIS

Evaluate relation between two or more economically important items (one starting point for further analysis). Mathematical expression of relation between two or more items.

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CASH FLOW ANALYSIS

primarily used as a tool to evaluate the sources and uses of funds. It also is used in cash flow forecasting and as part of liquidity analysis.

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VALUATION

important outcome of many types of business and financial statement analysis. Normally refers to estimating the intrinsic value of a company or its stock.

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PRESENT VALUE THEORY

This theory states the value of a debt or equity security (or for that matter, any asset) is equal to the sum of all expected future payoffs from the security that are discounted to the present at an appropriate discount rate. uses the concept of time value of money.

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SEC FORM 17-A

An annual report that contains audited annual financial statements, management discussion and analysis, and supplementary information. Annual reports shall be filed within one hundred five (105) calendar days after the end of the fiscal year covered by the report.

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SEC FORM 17-Q

This report contains quarterly financial statements, management discussion and analysis, and supplementary information. Quarterly reports shall be filed within forty five (45) calendar days after the end of each quarter covered by the report.

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SEASONALITY

When examining trends, we must consider effects of seasonality.

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YEAR-END ADJUSTMENTS

Companies often make adjustments in the final quarter. Many of these adjustments relate to the entire year.

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SEC FORM 17-C

An earnings announcement is made available to traders on the stock exchange and is often reported in the financial press. It provides key summary information about company position and performance for both quarterly and annual periods.

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SEC FORM 20-IS

used in connection with every annual meeting or other meeting of stockholders by publicly-listed companies, and to notify its shareholders who are entitled to vote or give an authorization or consent to any matter to be acted upon at a stockholders' meeting.

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PROXY STATEMENT

Details of board of directors, managerial ownership, managerial remuneration, and employee stock options.

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PROSPECTUS

Must accompany an application for an equity offering and main marketing document for the offer.

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements

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INTERNATIONAL FINANCIAL REPORTING STANDARDS

a set of international accounting standards, which state how particular types of transactions and other events should be reported in financial statements

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RELEVANCE

the capacity of information to affect a decision. This implies that timeliness is a desirable characteristic of accounting information.

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RELIABILITY

it must be verifiable, representationally faithful, and neutral.

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VERIFIABILITY

means the information is confirmable.

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REPRESENTATIONAL FAITFULNESS

means the information reflects reality,

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NEUTRALITY

means it is truthful and unbiased.

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COMPARABILITY

implies that information is measured in a similar manner across companies.

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CONSISTENCY

implies the same method is used for similar transactions across time.

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ACCRUAL ACCOUNTING

revenues are recognized when earned and expenses when incurred, regardless of the receipt or payment of cash.

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HISTORICAL COST

a measure of value used in accounting in which the value of an asset on the balance sheet is recorded at its original cost when acquired by the company.

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FAIR VALUE

estimates of the current economic value of an asset or liability.

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MATERIALITY

the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it possible that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.

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CONSERVATISM

Involves reporting the least optimistic view when faced with uncertainty in measurement.

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ACCRUALS

the sum of accounting adjustments that make net income different from net cash flow.

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ACCRUAL ADJUSTMENTS

adjust cash inflows and cash outflows to yield revenues and expenses.

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