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1、The analysis and use of financial statementChapter 1 FRAMEWORK FOR FINANCIAL STATEMENT ANALYSIS NEED FOR FINANCIAL STATEMENT ANALYSISThe United Sates has the most complex financial reporting system in the word. .Detailed ac-counting principles are augmented by extensive disclosure requirements .The
2、financial state-ments of large multinationals add up to dozens of pages, and many of these firms voluntarily publish additional “fact books” for dissemination to financial analysis and other interested users.Financial reporting in other major developed countries and many emerging markets has also ev
3、olved substantially in recent years .with an increasing emphasis on providing information useful to both domestic and foreign creditors and equity investors. International Accounting Standards have become a credible rival to U.S. standards.In an ideal word, the user of financial statements could foc
4、us only on the bottom lines financial reporting: net income and stockholders equity. If financial statements were comparable among companies (regardless of country),consistent over time , and always fully reflecting the economic position of firm , financial statement analysis would be simple , and t
5、his text a very short one.The financial reporting system is not perfect. Economic events and accounting entries do not correspond precisely; they diverge across the dimensions of timing, recognition, and measurement. Financial analysis and investment decisions are further complicated by variations i
6、n accounting treatment among countries in each of these dimensions.Economic events and accounting recognition of those events frequently take place at different times. One example of phenomenon is the recognition of capital gains and losses only upon sale in most cases. Appreciation of a real estate
7、 investment, which took place over a period of many years, for example, receives income statement recognition only in the period management chooses for its disposal.Similarly, long-lived assets are written down. Most of time. In the fiscal period of managements choice. The period of recognition may
8、be neither the period in which the impairment took place nor the period of sale or disposal. Accounting for discontinued operations. In the same manner. Results in recognition of loss in a period different from when the loss occurred or the disposal is consummated.In addition, many economic events d
9、o not receive accounting recognition at all. Most contracts, for example, are not reflected in financial statements when entered into, despite significant effects on financial condition and operating and financial risk .Some contracts, such as leases and hedging activities, are recognized in the fin
10、ancial statements by some companies, but disclosed only in footnotes by others. Disclosure requirements for derivatives and hedging activities are in place in many jurisdictions, but recognition and measurement is only recently required in the United Stated.Further, generally accepted accounting pri
11、nciples (GAAP) in the United States and elsewhere permit economic events that do receive accounting recognition to be recognized in different ways by different financial statement prepares. Inventory and depreciation of fixed assets are only two of the significant areas where comparability may be la
12、cking.Financial reports often contain supplementary data that, although not included in the statements themselves, help the financial statement user to interpret the statements or adjust measures of corporate performance (such as financial ratios) to make them more comparable, consistent over time,
13、and more representative of economic reality. When making adjustments to financial statements, we will seek to discern substance from form and exploit the information contained in footnotes and supplementary schedules of data in the annual report and SEC filings. The analytic treatment of “off-balanc
14、e-sheet ”financing activities is a good example of this process. We also illustrate the use of reconciliations to U.S. GAAP in foreign registrants Form 20-F filings.Finally, information from outside the financial reporting process can be used to make financial data more useful. Estimating the effect
15、s of changing prices on corporate performance, for example, may require the use of price data from outside sources.FOCUS ON INVESTMENT DECISIONSThis book is concerned with the concepts and techniques of financial analysis employed by users of financial statements who are external to the company. Pri
16、ncipal emphasis is on the financial statements of companies whose securities are publicly traded. The techniques described are generally applicable to the analysis of financial statements prepared according to U.S. GAAP. However, we will also discuss the pronouncements of the International Accounting Standards Board (IASB) and standard setters in other countries, compare them to U.S. GAAP, and analyze financial statements prepared in accordance with these other repor
