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
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
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)
2.7 Financial Reporting in Practice (Slide 86)
• Enron (Slide 86)
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
increases and decreases in the components of the identity on ROE.
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
statements that cannot be found elsewhere in the financial statements.
2-9 List and describe the financial scandals described in the text, along with the new legislation
designed to reduce those types of fraud.
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.
Table 2.4 summarizes the financial ratios discussed throughout the chapter.
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: