FINANCIAL STATEMENT

ANALYSIS
Fin-4201 Financial Analysis
Fourth Year / Eight Semesters
Major-Finance

Muhammad Majidul Haq Patwary, FRM

AVP and Senior Manager, The City Bank Limited
Course Outline: Part A
Financial Statement Analysis and The Account
Framework
1. Objective of Financial Statement Analysis
2. Financial Statement Analysis and Accounting
3. Accounting Objectives, Conventions, and Standards-
Their Implications for Analysis
4. Tools and Techniques of Financial Statement Analysis-
An Overview
Course Outline: Part B
Financial Statements- The Raw Material of Analysis
5. Analysis of Current Assets
6. Analysis of Noncurrent Assets
7. Analysis of Liabilities
8. Analysis of Stockholders Equity
9. Inter-corporate Investments, Business Combinations, and
Foreign Operations
10. Analysis of Income Statement
11. Earnings Per Share- Computation and Evaluation
12. Statement of Cash Flows
13. Effects on Price Changes on Financial Statements
14. The Auditor’s Opinion- Meaning and Significance
Course Outline: Part C
Financial Statement Analysis- The Main Areas of
Emphasis
15. Analysis of Short Term Liquidity
16. Funds Flow Analysis and Financial Forecast
17. Analysis of Capital Structure and Long Term Solvency
18. Analysis of Return on Investment and of Asset
Utilization
19. Analysis of Results of Operations
20. The Evaluation and Protection of Earnings
21. Comprehensive Analysis of Financial Statements
 Recommended Books & Procedures to be followed

Recommended Books:
• Leopold A. Bernstein, Financial Statement Analysis –Theory,
Application, and Interpretation (5th Edition)
• George Forster, Financial Statement Analysis
Procedures to be Followed:
• Soft copes of Lectures, Handouts, Notes, and other materials
will be sent to each of the students in a Group E-mail
• Some concept checking surprise quizzes will be arranged
• Before Mid Term Part A & B of Course Outline will be
completed
• Last 10 minutes of each class will be for Question and Answer
Financial Statement
Financial statements (or financial reports) are formal records of the financial
activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form
which is easy to understand. They typically include four basic financial statements
accompanied by a management discussion and analysis:
• A balance sheet or statement of financial position, reports on a company's
assets, liabilities, and owners equity at a given point in time.
• An income statement—or profit and loss report (P&L report), or statement of
comprehensive income, or statement of revenue & expense—reports on a
company's income, expenses, and profits over a stated period of time. A profit and
loss statement provides information on the operation of the enterprise. These
include sales and the various expenses incurred during the stated period.
• A statement of changes in equity or equity statement, or statement of retained
earnings, reports on the changes in equity of the company over a stated period of
time.
• A cash flow statement reports on a company's cash flow activities, particularly its
operating, investing and financing activities over a stated period of time.
Financial Statement Analysis
Financial statement analysis (or financial analysis) is the
process of reviewing and analyzing a company's
financial statements to make better economic decisions.
Financial statement analysis is a method or process
involving specific techniques for evaluating risks,
performance, financial health, and future prospects of
an organization.
Chapter 1: Objective of
Financial Statement Analysis
Objective of Users of Financial Data
• The main objective of financial statement analysis is to
provide information about the financial position,
performance and changes in financial position of a
company that is useful to a wide range of users in
making economic decisions. Most important Categories of
Users of Financial Data are:
• Credit Grantors
• Equity Investors
• Management
• Acquisition and Merger Analysts
• Auditors
• Other Interested Groups
Objective of Credit Grantors
• Credit Grantors are lenders of funds to an enterprise
• Fixed nature of the Rewards
• The Equity investors looks for future prospect of earnings
& Changes for those earnings on the other hand The
Credit Guarantors is concerned with specific security
provision
• Techniques varies Terms, Security, and Purpose of Loan
• Short Term: Current Financial Condition, Liquidity,
profitability, Turnover, Capital Structure
• Long Term: Detailed Forward looking Inquiry, Projection,
Profitability, Capital, Asset Value and its liquidity
Objective of Equity Investors
• Equity Investors are Supplier of Basic Risk Capital
• Information needs are most demanding & Comprehensive
• Common Stock Valuation is complex because in addition
to FS, General Economy, industry position, competitive
stance, and quality of Management needs to be assessed
• Basis of most modern stock valuation techniques and
models is present value theory
• V=bE(t)/(k-g) i.e. b= Dividend per Share/ EPS
• Value of Stock = Current Dividend Rate/ (Discount Rate-
Growth Rate)
• Data Required for stock valuation
Objective of Equity Investors- Cont..
Developments in Investment Theory:
• Portfolio Theory: Markowitz: Under certain assumption,
there is a linear relationship between risk and return.
Assumptions: Rational Investors are risk averse and Risk
can me minimized through diversification.
Categories of Risk:
• Systematic Risk (beta): That Portion of Total Risk
attributable to the movement of the market as a whole.
One for market Portfolio and zero for T Bill
• Unsystematic Risk: Residual Risk that is unique to a
specific security. Economic Risk, Business Risk, Financial
Risk, Accounting Risk
Objective of Equity Investors Cont…
• CAPM: Sharp and Linter (1964) extended Portfolio Theory
to CAPM intended to explain how asset prices are
determined in such a way as to provide greater return for
greater risk. Assumptions: 1. Risk free security. 2. Borrow
or lend Unlimited amounts at the Risk-free Rate 3.
Identical Investment horizon
• EMH: EMH deals with the reaction of market prices to
financial and other Data. Aggregate rather than Individual
investor behavior.
• Implications: Even If all the information reflected in its
price, that price may not reflect true value. Information
and Interpretation is essential.
Objective of Management
• Mgt. primary Objective is to exercise control over and to
view the enterprise in the way such as creditors and
investors view it.
• As Mgt. has unlimited access to internal accounting and
other records, they can undertake FS on a continuous
basis.
• Ratio, Change, and Trend analysis is based on an
intelligent, alert, and systematic surveillance of significant
relationships in a business situation and the timely
detection and interpretation of problem areas by an
analysis of changes taking place.
• No event is isolated and should not act isolated.
Objectives of Acquisition & Merger Analysts
• The Objective of the acquisition and merger analyst are in
many respects similar to those of the equity investor
except that the analysis of the acquisition of an entire
enterprise must go further and stress the valuation of
assets, including intangible assets such as goodwill, and
liabilities included in the acquisition or merger plan.
Objectives of Auditors
• One of the basic objectives of the audit process is to
obtain the greatest possible degree of assurance about
the absence of errors and irregularities, intestinal or
otherwise, that if undetected could materially affect the
fairness of presentation of financial summarizations or
their conformity with GAAP.
• The application of financial statement analysis as part of
the audit program is best undertaken at the very
beginning of the audit because such analysis will often
reveal the areas of greatest change and vulnerability,
areas to which the auditor will want to direct a major part
of his attention.
Objective of Other Interested Groups
• Internal revenue service [NBR of BD] can apply tools and
techniques of financial statement analysis to the audit of
tax returns and the checking of the reasonableness of
reported amounts.
• Various Governmental regulatory agencies can use such
techniques in the exercise of their supervisory and rate-
determination functions.
• Labor unions, Lawyers, economic researchers,
customers.
Questions & Answers
Thank You