This document provides an overview of financial statement analysis and valuation. It begins with an introduction on the purpose of financial reporting and analysis in helping investors understand a firm's profitability and risk. It then outlines a 4-step process for financial statement analysis: 1) understanding industry characteristics, 2) analyzing company strategies, 3) assessing financial statement quality, and 4) analyzing profitability and risk. The document delves into various tools and frameworks for industry analysis, accounting principles, and analyzing different financial statements and key ratios. It also covers topics such as investing, financing, and operating activities, and how they are reported in financial statements.

1. FINANCIAL STATEMENTS
ANALYSIS
TIME TO PUT OUR ACCOUNTING HAT ON!

2. Introduction
The process of financial reporting, financial statement
analysis, and valuation is intended to help investors and
analysts to deeply understand a firm’s profitability and risk
and to use that information to forecast future profitability
and risk and ultimately value the firm, enabling intelligent
investment decisions. This process lies at the heart of the
role of accounting, financial reporting, capital markets,
investments, portfolio management, and corporate
management in the world economy.

3. “Big Picture” Framework for Analysis

4. Overview of Financial Statement Analysis
Step 3: Assess the Quality of the Financial Statements
 Accounting Principles
 Balance Sheet—Measuring Financial Position
 Income Statement—Measuring Operating
Performance
 Statement of Cash Flows
 Important Information with the Financial Statements
 Summary of Financial Statements, Notes, MD&A,
and Managers’ and Auditors’ Attestations
Step 4: Analyze Profitability and Risk
 Tools of Profitability and Risk Analysis
Step 1: Identify the Industry Economic
Characteristics
Tools for Studying Industry Economics
 Value Chain Analysis
 Porter’s Five Forces Classification
Framework
 Economic Attributes Framework
Step 2: Identify the Company Strategies
Framework for Strategy Analysis

5. Asset and Liability Valuation and
Income Recognition
Introduction to the Mixed Attribute Accounting
Model
Asset and Liability Valuation
 Historical Value: Acquisition Cost
 Historical Value: Adjusted Acquisition Cost
 Historical Value: Initial Present Value
 Current Values: Fair Value
 Current Values: Fair Value Based on Current
Replacement Cost
 Current Values: Fair Value Based on Net
Realizable Value
Income Recognition
 Approach 1: Economic Value Changes
Recognized on the Balance Sheet and
Income Statement When Realized
 Approach 3: Economic Value Changes
Recognized on the Balance Sheet and the
Income Statement When They Occur
 Approach 2: Economic Value Changes
Recognized on the Balance Sheet When
They Occur but Recognized on the Income
Statement When Realized

6. Asset and Liability Valuation and
Income Recognition
Income Taxes
 Overview of Financial Reporting of
Income Taxes
 Measuring Income Tax Expense: A Bit
More to the Story (to Be Technically
Correct)
 Reporting Income Taxes in the Financial
Statements
Framework for Analyzing the Effects of
Transactions on the Financial
Statements
 Overview of the Analytical
Framework
 Summary of the Analytical
Framework

7. Income Flows versus Cash Flows:
Understanding the Statement of Cash
Flows
Understanding the Relations among Net
Income,Balance Sheets, and Cash Flows
 The Relations among Cash Flows from
Operating, Investing, and Financing Activities
 The Relation between Cash Balances and Net
Cash Flows
 The Operating Section of the Statement of
Cash Flows
 The Relation between Net Income and Cash
Flow from Operations
 Aside: Earnings before Interest, Taxes,
Depreciation and Amortization (EBITDA)
Preparing the Statement of Cash Flows
 Algebraic Formulation
 Classifying Changes in Balance Sheet
Accounts
 Illustration of the Preparation Procedure
 Using the Statement of Cash Flows to
Assess Earnings Quality

8. Profitability Analysis
Overview of Profitability Analysis
Earnings Per Share (EPS)
 Calculating EPS
 Criticisms of EPS
Common-Size Analysis
Percentage Change Analysis
Alternative Definitions of Profits
 Comprehensive Income
 Operating Income, EBIT, EBITDA,
and Other Profit Measures
 Segment Profitability
 Pro Forma, Adjusted, or Street
Earnings
Rate of Return on Assets (ROA)
 Two Comments on the
Calculation of ROA
 Disaggregating ROA
 Economic and Strategic
Factors in the Interpretation
of ROA
 Analyzing the Profit Margin
for ROA
 Analyzing Total Assets
Turnover
 Supplementing ROA in
Profitability Analysis
Rate of Return on Common
Shareholders’ Equity (ROCE)
 Benchmarks for ROCE
 Relating ROA to ROCE
 Disaggregating ROCE
Interpreting Financial
Statement Ratios
 Comparisons with Earlier
Periods
 Comparisons with Other
Firms

9. Risk Analysis
Analyzing Short-Term Liquidity
Risk
 Current Ratio
 Quick Ratio
 Operating Cash Flow to
Current Liabilities Ratio
 Working Capital Turnover
Ratios
 Revenues to Cash Ratio
 Days Revenues Held in
Cash
 Summary of Short-Term
Liquidity Risk
Disclosures Regarding Risk and Risk
Management
 Firm-Specific Risks
 Commodity Prices
Financial Statement Analysis of Risk
Analyzing Financial Flexibility: Alternative
Approaches to Disaggregate ROCE
 Summary of Financial Flexibility
Analyzing Long-Term Solvency Risk
 Debt Ratios
 Interest Coverage Ratios
 Operating Cash Flow to Total
Liabilities Ratio
 Summary of Long-Term Solvency Risk
Analyzing Credit Risk
 Circumstances Leading to
Need for the Loan
 Credit History
 Cash Flows
 Collateral
 Capacity for Debt
 Contingencies
 Character of Management
 Communication
 Conditions or Covenants
 Summary of Credit Risk
Analysis

10. Risk Analysis
Market Equity Beta Risk
Financial Reporting Manipulation Risk
 Motivations for Earnings Manipulation
 Empirical Research on Earnings Manipulation
 Application of Beneish’s Model to a company
 Summary of Earnings Manipulation Risk

11. Financing Activities
Equity Financing
 Investments by Shareholders:
Common Equity Issuance
 Distributions to Shareholders:
Dividends
 Distributions to Shareholders: Share
Repurchases
 Equity Issued as Compensation:
Stock Options
 Fair Value Method and Required
Disclosures
 Net Income, Retained Earnings,
Accumulated Other
 Comprehensive Income, and
Reserves
 Summary and Interpretation of
Equity
Debt Financing
 Principles of Liability
Recognition
 Principles of Liability Valuation
 Application of Criteria for
Liability Recognition
 Contingent Obligations
 Financing with Long-Term
Debt
 Financial Reporting of Long-
Term Debt
 Measuring Fair Value
 Reducing Debt
 Troubled Debt
Additional Issues in Liability
Recognition and Debt Financing
 Hybrid Securities
 Off-Balance-Sheet Financing
Arrangements
Leases
 Operating Lease Method
 Capital Lease Method
 Choosing the Accounting
Method
 Converting Operating Leases
to Capital Leases
 Impact of Accounting for
Operating Leases as Capital
Leases

12. Investing Activities
Investments in Long-Lived Operating Assets
 Are the Acquisition Costs “Assets”?
 What Choices Are Managers Making to
Allocate Acquisition Costs to the Periods
Benefited?
 What Is the Relationship between the
Book Values and Market Values of Long-
Lived Assets?
 When Will the Long-Lived Assets Be
Replaced?
Investments in Securities
 Percentage of Ownership
 Minority, Passive Investments
 Minority, Active Investments
 Majority, Active Investments
 Consolidation of Unconsolidated Subsidiaries
and Affiliates
 Joint Ventures: Proportionate Consolidation of
Unconsolidated Subsidiaries and Affiliates

13. Operating Activities
Accomplishments (Revenue Recognition)
 Criteria for Revenue Recognition
 Application of Revenue Recognition Criteria
 Revenue Recognition at the Time of Sale
(Delivery)
 Delaying Revenue Recognition When
Substantial Performance Remains
 Income Recognition under Long-Term
Contracts
 Revenue Recognition When Cash
Collectability Is Uncertain
 Investment in Working Capital: Accounts
Receivable and Deferred Revenues
Efforts (Expense Recognition)
 Criteria for Expense Recognition
 Cost of Sales
 Reporting Changes in the Fair Market
Value of Inventory
 Accounting Quality: Cost of Sales and
Inventory
 Investment in Working Capital: Inventory
and Accounts Payable
 SG&A (Selling, General, and
Administrative) Costs
 Operating Profit

14. Accounting Quality
Accounting Quality
 High Quality Reflects Economic Information Content
 High Quality Leads to Earnings Persistence over Time
Specific Events and Conditions That Affect Earnings Quality
 Discontinued Operations
 Extraordinary Gains and Losses
 Changes in Accounting Principles
 Other Comprehensive Income Items
 Impairment Losses on Long-Lived Assets
 Restructuring and Other Charges
 Changes in Estimates
 Gains and Losses from Peripheral Activities
 Summary of Accounting Data Adjustments
Restated Financial Statement Data
Accounting Classification Differences
Financial Reporting Worldwide
Earnings Management
 Incentives to Practice Earnings
Management
 Disincentives to Practice Earnings
Management
 Boundaries of Earnings Management

15. Training Desktop
 Date : see at the website “futurum corfinan” (3-day training)
 Venue : Hotel at Jakarta Pusat
 Note :
 Presentation slides will be distributed in softcopy
 Minimum participants = 10 persons
 After the training, participants are allowed to discuss about the
training materials via email in the website
 Contact email : futurumcorfinan@gmail.com
 Visit Website and Training Testimonials : google “futurum corfinan”