Type:
Solution Manual
Resource:
Financial Statement Analysis
Edition:
11th Edition
Author(s):
K. R. Subramanyam
Comprehensive Case - Applying Financial Statement Analysis
Comprehensive Case Applying Financial Statement Analysis REVIEW A comprehensive case analysis of the financial statements and notes of Campbell Soup Company is our focus. The book has prepared us to tackle all facets of financial statement analysis. This comprehensive case analysis provides us the opportunity to illustrate and apply these analysis tools and techniques. This case also gives us the opportunity to show how we draw conclusions and inferences from detailed analysis. We review the basic steps of analysis, the building blocks, and the attributes of an expert analysis report. Throughout the case we emphasize applications and inferences associated with financial statement analysis.
CC-1 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Comprehensive Case - Applying Financial Statement Analysis
OUTLINE •
Steps in Analyzing Financial Statements
•
Building Blocks of Financial Statement Analysis
•
Reporting on Financial Statement Analysis
•
Specialization in Financial Statement Analysis
•
Comprehensive Case: Campbell Soup Company Preliminary Financial Analysis Short-Term Liquidity Capital Structure and Solvency Return on Invested Capital Analysis of Asset Utilization Analysis of Operating Performance and Profitability Forecasting and valuation Summary Evaluation and Inferences
CC-2 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Comprehensive Case - Applying Financial Statement Analysis
ANALYSIS OBJECTIVES •
Describe the steps in analyzing financial statements.
•
Review the building blocks of financial statement analysis.
•
Explain important attributes of reporting on financial statement analysis.
•
Describe implications to financial statement analysis from evaluating companies in specialized industries or with unique characteristics.
•
Analyze in a comprehensive manner the financial statements and notes of Campbell Soup Company.
CC-3 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Comprehensive Case - Applying Financial Statement Analysis
QUESTIONS 1. The six major "building blocks" of financial analysis that we have studied are: i. Short-term liquidity—the ability to meet short-term obligations. ii. Cash analysis and forecasting—future availability and disposition of cash. iii. Capital structure and solvency—ability to generate future revenues and meet longterm obligations. iv. Return on invested capital—ability to provide financial rewards sufficient to attract and retain financing. v. Asset utilization (turnover)—asset intensity in generating revenues to reach a sufficient profitability level. vi. Operating performance and profitability—success at maximizing revenues and minimizing expenses from operating activities over the long run. The initial step in applying the building blocks to financial statement analysis involves: i. Determining the specific objectives of the analysis task. ii. Arriving at a judgment about which of the six major areas of analysis must be evaluated with what degree of emphasis and in what order of priority. 2. Financial statement analysis is oriented toward the achievement of specific objectives. So that an analysis can best serve these objectives, the first step is to define them carefully. The thinking and clarification leading up to the definition of objectives is an important part of the analytical process as it insures a clear understanding of objectives, of what is pertinent and relevant, and thus leads to avoidance of unnecessary work. This is indispensable to an effective as well as an efficient analysis. Effectiveness, given the specific objectives, is enhanced because of a focus on the most important elements of the financial statements in light of the decision task. It is also efficient in that it leads to an analysis with maximum economy of time and effort. 3. An analyst of financial statement data must always bear in mind that financial statements are at best an abstraction of an underlying reality. Further mathematical manipulation of financial data can result in second, third, and even further levels of abstractions. As the book mentioned, no set of photos of the Rocky Mountains can fully convey the grandeur of the terrain. One has to see them to fully appreciate them. This is because photos, like financial statements, are at best, abstractions. That is why analysts must, at some point, leave the financial statements and “visit the companies” to get a full understanding of the phenomena underlying by the analysis. This is particularly true because of the static nature of the abstractions found in the financial statements. In contrast, business reality is dynamic and constantly changing. 4. The financial analyst must recognize that there are industries with distinct accounting treatments that arise either from their specialized nature or from the special conditions in which they operate (such as governmental regulations). The analysis of the financial statements of such a company requires a thorough understanding of the accounting peculiarities to which they are subject. Accordingly, the analyst must be prepared for this task by studying and understanding the specialized areas of accounting which affect the analysis. Examples of specialized industries include oil and gas, life insurance, and public utilities. As in any field of endeavor, specialized areas of inquiry require that specialized knowledge be brought to bear upon them. Financial statement analysis is, of course, no exception. CC-4 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.