Banking Chapter 2 Introduction Financial Statement Analysis Outline The Following Outline Correlated

Unlock access to all the studying documents.

View Full Document

Chapter 2

Introduction to Financial Statement Analysis

I. Chapter Outline

The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides

are referenced in bold. Alternative Examples to selected textbook examples are also available in the

PowerPoint Lecture Slides and are also referenced in bold.

2.1 Firms’ Disclosure of Financial Information (Slide 8)

2.2 The Balance Sheet (Slides 11-12)

• Table 2.1: Global Conglomerate Corporation Balance Sheet for 2012 and 2011 (Slide 15)

• Assets (Slides 13–14)

– Current Assets

– Long-Term Assets

• Liabilities (Slides 16–18)

– Current Liabilities

– Long-Term Liabilities

• Stockholders’ Equity (Slide 20)

– Market Value Versus Book Value (Slide 21–22)

– Enterprise Value (Slide 23)

• Example 2.1 Market Versus Book Value (Slides 24–25)

• PowerPoint Alternative Example 2.1 (Slides 26–27)

2.3 The Income Statement (Slide 28)

• Earnings Calculations (Slides 28–34)

– Gross Profit (Slide 28)

2.4 The Statement of Cash Flows (Slide 35–36)

• Operating Activity (Slide 37)

• Table 2.3 Global Conglomerate Corporation Statement of Cash Flows for 2015 and 2014

(Slide 39)

Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 5

• Investment Activity (Slide 38)

• Financing Activity (Slide 38)

• Example 2.2 The Impact of Depreciation on Cash Flow (Slides 40–41)

• PowerPoint Alternative Example 2.2 (Slides 42–43)

2.5 Other Financial Statement Information (Slide 44)

• Statement of Stockholders’ Equity (Slide 44)

2.6 Financial Statement Analysis (Slide 51)

• Profitability Ratios (Slide 52–53)

• Figure 2.1 EBIT Margins for Five U.S. Airlines (Slide 54)

• Liquidity Ratios (Slide 55)

• Example 2.4 Computing Liquidity Ratios (Slides 56–57)

• PowerPoint Alternative Example 2.4 (Slides 58–60)

• Working Capital Ratios (Slide 61–62)

• Interest Coverage Ratios (Slide 63)

• Example 2.5 Computing Interest Coverage Ratios (Slides 64–65)

• PowerPoint Alternative Example 2.5 (Slides 66–67)

• Leverage Ratios (Slides 68–69)

• Valuation Ratios (Slide 70)

• The DuPont Identity (Slide 80)

• Example 2.8 Determinants of ROE (Slides 81–82)

• PowerPoint Alternative Example 2.8 (Slides 83–84)

• Table 2.4 A Summary of Key Financial Ratios (Slide 85)

2.7 Financial Reporting in Practice (Slide 86)

• Enron (Slide 86)

• WorldCom (Slide 86)

• Sarbanes-Oxley Act (Slide 86)

• Dodd-Frank Act (Slide 86)

• Global Financial Crisis: Bernie Madoff’s Ponzi Scheme

II. Learning Objectives

2-1 List the four major financial statements required by the SEC for publicly traded firms, define

2-3 Compute the following measures, and describe their usefulness in assessing firm performance:

2-4 Discuss the uses of the DuPont Identity in disaggregating ROE, and assess the impact of

2-6 Distinguish between cash flow, as reported on the statement of cash flows, and accrual-based

2-7 Explain what is included in the management discussion and analysis section of the financial

III. Chapter Overview

This chapter reviews the four main financial statements and discusses some useful financial ratios.

The chapter closes with a look at some recent financial scandals.

2.1 Firms’ Disclosure of Financial Information

The four statements that are required by the U.S. Securities and Exchange Commission (SEC) are the

2.2 The Balance Sheet

The balance sheet lists the firm’s assets and liabilities. This section describes current assets, long-term

assets, current liabilities and long-term liabilities, with examples of the major components of each.

2.3 The Income Statement

The income statement lists the firm’s revenues and expenses over a period. This section of the text

2.4 The Statement of Cash Flows

2.5 Other Financial Statement Information

The statement of stockholders’ equity provides detailed information about additions to, or reductions

2.6 Financial Statement Analysis

Profitability ratios, such as operating margin and net profit margin, are often used to measure the

fraction of revenues that is available to common shareholders. Liquidity ratios are often used by

creditors to assess financial solvency. Example 2.4 illustrates computation of some liquidity ratios.

2.7 Financial Reporting in Practice

There have been several recent abuses of financial rules, including Enron and WorldCom. Enron sold

assets at inflated prices to other firms, together with a promise to buy back assets at an even higher

IV. Spreadsheet Solutions in Excel

The following problems for Chapter 2 have spreadsheet versions available: 10, 11, 13, 15, 16, 17, and

20. These spreadsheets can be downloaded from the Instructor’s Resource Center at: