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My Profile
Teaching staff:
Coordinator: Mr Teh Boon Heng
Room No: FOM BR3009
Contact No: 03-83125052, 012-6030880
Consultation Hours: Monday
: 1pm 3pm
Wednesday : 1pm -3pm
Email: bhteh@mmu.edu.my

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BFN 2244

Emphasize: Theory and Calculation/Application

Teaching approach: Via diagram/current issues for each topic

Simplify the course

Better understanding
Interesting

Assessment:

20% Mid Term Exam

25% Group Assignment (6-7 students in one group)
5% Individual Class Participation
50% Final Exam

Tutorial
- Questions will based on the text book (Students are encouraged to buy textbook)
- Tutorial questions will be attached at the last slide of each lecture note

Primary Text Book

K.R.Subramanyam John.J.Wild, Financial Statement Analysis, 11/E , McGraw-Hill, USA

Overview of Financial
Statement Analysis

CHAPTER

1-3

1-4

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Business
Activities

Financial
Statement Analysis

Financial
Statement
Accounting
Analysis

Financial
Analysis

Comparative

Prospective
Analysis

Common
Size

Ratio

Preview
Analysis

Valuation

1-5

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

1-6

Business Analysis
Evaluate Prospects

Evaluate Risks
Business Decision Makers

Equity investors
Creditors
Managers
Merger and Acquisition Analysts
External Auditors
Directors
Regulators
Employees & Unions
Lawyers

1-7

Information Sources for Business

Analysis
Quantitative
Financial Statements

Qualitative
Management discussion & Analysis
Chairpersons Letter

Industry Statistics
Press Releases

Economic Indicators
Financial press

Regulatory filings
Trade reports

Vision/Mission Statement
Web sites

1-8

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Financial
Statement Analysis

Financial
Statement
Analysis

1-9

Component Processes
of Business Analysis

Business
Environment &
Strategy Analysis
Industry
Analysis

Strategy
Analysis

Financial
Analysis

Accounting
Analysis

Analysis
of cash
flows
Risk
Profitability
Analysis
Analysis

Cost of Capital Estimate

Prospective
Analysis

Intrinsic Value

1-10

Book Organization
Financial Statement Analysis
Part I
Introduction and Overview

Chapter 1: Overview of
Financial Statement
Analysis
Chapter 2: Financial
Reporting and
Analysis

Part II
Accounting Analysis
Chapter 3: Analyzing
Financial Activities
Chapter 4: Analyzing
Investing Activities
Chapter 5: Analyzing
Investing Activities:
Special topic
Chapter 6: Analyzing
Operating Activities

Part III
Financial Analysis
Chapter 7: Cash Flow
Analysis
Chapter 8: Return on
Invested Capital &
Profitability Analysis
Chapter 9: Credit
Analysis
Chapter 10: Prospective
Analysis
Chapter 11: Equity
Analysis and Valuation

1-11

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Accounting
Analysis

Financial
Statement Analysis

1-12

Accounting Analysis
Process to evaluate and adjust financial
statements to better reflect economic reality
Comparability problems across firms and across time
Manager estimation error
Distortion problems

Earnings management
Accounting Standards

Accounting
Risk

1-13

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Accounting
Analysis

Financial
Statement Analysis

Financial
Analysis

1-14

Financial Analysis
Process to evaluate financial position and
performance using financial statements
Profitability analysis Evaluate return
on investments
Analysis of
cash flows

Evaluate source &

deployment of funds

Risk analysis Evaluate riskiness

& creditworthiness

Common tools
Ratio
Cash
Analysis flow
Pg. 36-37 analysis

1-15

Credit Analysis
Credit worthiness: Ability to honor credit obligations
(downside risk)

Liquidity
Ability to meet shortterm obligations
Focus:
Current cash flows
Make up of current
assets and liabilities
Liquidity of assets

Solvency
Ability to meet longterm obligations
Focus:
Long-term profitability
Capital structure

1-16

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Accounting
Analysis

Financial
Statement Analysis

Financial
Analysis

Prospective
Analysis

1-17

Prospective Analysis
Process to forecast future payoffs
Business Environment
& Strategy Analysis
Accounting Analysis
Financial Analysis

Intrinsic Value

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Equity Analysis
Assessment of downside risk and upside potential

Technical analysis /
Charting
Patterns in price or
volume history of a
stock
Predict future price
movements

Fundamental
Analysis/Prospective
Analysis
Determine Intrinsic value
without reference to price
Analyze and interpret key
factors
Economy
Industry
Company

1-19

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Accounting
Analysis

Financial
Statement Analysis

Financial
Analysis

Business
Activities

Prospective
Analysis

1-20

Business Activities
Investing
Activities (Chp. 4 & 5)

Planning
Activities

Financial
Activities (Chp. 3)

Operating Activities (Chp. 6)

Revenues and expenses from providing
goods and services

1-21

Financial Statements Reflect Business Activities

Planning

Investing

Operating

Current:

Cash
Accounts Receivable
Inventories
Marketable Securities

Noncurrent:
Land, Buildings, &
Equipment

Patents

Investments

Assets

Balance Sheet

Sales
Cost of Goods Sold
Selling Expense
Administrative Expense
Interest Expense
Income Tax Expense

Financing
Current:

Noncurrent:

Net Income

Income
statement
Cash Flow
Statement of
Cash Flows

Notes Payable
Accounts Payable
Salaries Payable
Income Tax Payable
Bonds Payable
Common Stock
Retained Earnings

Liabilities & Equity

Balance Sheet

Statement of
Shareholders Equity

1-22

Business Activities

Investing activities
Buying resources
Selling resources

Investing

Financing

Investing = Financing

1-23

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Business
Activities

Financial
Statement Analysis

Financial
Statement
Accounting
Analysis

Financial
Analysis

Prospective
Analysis

1-24

Financial Statements (New Name)

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Balance Sheet
Total Investing = Total Financing
= Creditor Financing + Owner Financing

Colgate Financing
(in $billions)
$9.138 = $7.727 + $1.410

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Income Statement
Revenues Cost of goods sold = Gross Profit
Gross profit Operating expenses = Operating Profit

Colgates Profitability
(in $billions)
$12.238 - $5.536 = $6.701 Gross Profit
$6.701 - $4.5411 = $2.160 Operating profit

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Statement of Cash Flows

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Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Business
Activities

Financial
Statement Analysis

Financial
Statement
Accounting
Analysis

Financial
Analysis

Prospective
Analysis

Preview
Analysis

Additional Information
(Beyond Financial Statements) : (How and Where to
access ?)
Managements Discussion & Analysis (MD&A)
Management Report
Auditor Report
Explanatory Notes to Financial Statements
Supplementary Information
Proxy Statement

1-32

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Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Business
Activities

Financial
Statement Analysis

Financial
Statement
Accounting
Analysis

Financial
Analysis

Comparative

Prospective
Analysis

Preview
Analysis

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Analysis Preview
Yr1

Yr2

Yr3

Comparative Analysis
Purpose: Evaluation of consecutive
financial statements
Output: Direction, speed, & extent of any
trend(s)
Types: Year-to-year Change Analysis
Index-Number Trend Analysis

1-35

Analysis Preview

1-36

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Business
Activities

Financial
Statement Analysis

Financial
Statement
Accounting
Analysis

Financial
Analysis

Comparative

Prospective
Analysis

Common
Size / %

Preview
Analysis

1-37

Analysis Preview
Common-Size Analysis
Purpose : Evaluation of internal makeup
of financial statements
Evaluation of financial statement
accounts across companies
Output:
Proportionate size of assets,
liabilities, equity, revenues, &
expenses

1-38

Analysis Preview

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Analysis Preview

1-40

Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Business
Activities

Financial
Statement Analysis

Financial
Statement
Accounting
Analysis

Financial
Analysis

Comparative

Prospective
Analysis

Common
Size

Ratio

Preview
Analysis

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Analysis Preview
Ratio Analysis
Purpose :

Evaluate relation between two or more

economically important items (one
starting point for further analysis)
Output:
Mathematical expression of relation
between two or more items
Cautions: Prior Accounting analysis is important
Interpretation is key - long vs short
term & benchmarking

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Overview of Financial
Statement Analysis

Introduction to
Business Analysis

Business
Activities

Financial
Statement Analysis

Financial
Statement
Accounting
Analysis

Financial
Analysis

Comparative

Prospective
Analysis

Common
Size

Ratio

Preview
Analysis

Valuation

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Analysis Preview
Valuation
Valuation - an important goal of many types
of business analysis

Purpose: Estimate intrinsic value of a

company (or stock)
Basis:
Present value theory (time value of
money)

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Analysis Preview
Debt (Bond) Valuation

Btt is the value of the bond at time t

Itt +n
is the interest payment in period t+n
+n
F is the principal payment (usually the debts face value)
r is the investors required interest rate (yield to maturity)

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Analysis Preview
Equity Valuation

Vtt is the value of an equity security at time t

Dtt +n
is the dividend in period t+n
+n
k is the cost of capital
E refers to expected dividends

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Book Organization
Financial Statement Analysis
Part I
Introduction and Overview

Chapter 1: Overview of
Financial Statement
Analysis
Chapter 2: Financial
Reporting and
Analysis

Part II
Accounting Analysis
Chapter 3: Analyzing
Financial Activities
Chapter 4: Analyzing
Investing Activities
Chapter 5: Analyzing
Investing Activities:
Special topic
Chapter 6: Analyzing
Operating Activities

Part III
Financial Analysis
Chapter 7: Cash Flow
Analysis
Chapter 8: Return on
Invested Capital &
Profitability Analysis
Chapter 9: Credit
Analysis
Chapter 10: Prospective
Analysis
Chapter 11: Equity
Analysis and Valuation

1-47

Tutorial Question

Page 47 & 48
1-1
1-4
1-5
1-6
1-9
1-11
1-15
1-18
Identify and discuss sources of Financial
data/information (Domestic and International
Sources)