Financial Statement Analysis

2.

Understanding Financial Statements

2.1.

The Balance Sheet

2.1.1.

Fundamental Concepts

2.1.1.1.

Accounting Equation

2.1.1.1.1.

Assets Equal Liabilities Plus Equity

2.1.1.1.2.

Balance Sheet Balancing

2.1.1.1.3.

Double-Entry Bookkeeping Impact

2.1.1.2.

Point-in-Time Snapshot

2.1.1.2.1.

Reporting Date Significance

2.1.1.2.2.

Timing Considerations

2.1.1.3.

Classification Principles

2.1.1.3.1.

Current vs Non-Current

2.1.1.3.2.

Liquidity-Based Ordering

2.1.2.

2.1.2.1.

2.1.2.1.1.

Cash and Cash Equivalents

2.1.2.1.1.1.

2.1.2.1.1.2.

Demand Deposits

2.1.2.1.1.3.

Short-Term Highly Liquid Investments

2.1.2.1.1.4.

Restricted Cash

2.1.2.1.2.

Short-Term Investments

2.1.2.1.2.1.

Marketable Securities

2.1.2.1.2.2.

Trading Securities

2.1.2.1.2.3.

Available-for-Sale Securities

2.1.2.1.3.

Accounts Receivable

2.1.2.1.3.1.

Trade Receivables

2.1.2.1.3.2.

Allowance for Doubtful Accounts

2.1.2.1.3.3.

Notes Receivable

2.1.2.1.4.

2.1.2.1.4.1.

2.1.2.1.4.2.

Work-in-Process

2.1.2.1.4.3.

2.1.2.1.4.4.

Inventory Valuation Methods

2.1.2.1.5.

Prepaid Expenses

2.1.2.1.5.1.

Prepaid Insurance

2.1.2.1.5.2.

2.1.2.1.5.3.

Other Prepaid Items

2.1.2.1.6.

Other Current Assets

2.1.2.1.6.1.

2.1.2.1.6.2.

2.1.2.1.6.3.

Miscellaneous Current Assets

2.1.2.2.

Non-Current Assets

2.1.2.2.1.

Property Plant and Equipment

2.1.2.2.1.1.

2.1.2.2.1.2.

2.1.2.2.1.3.

Machinery and Equipment

2.1.2.2.1.4.

Accumulated Depreciation

2.1.2.2.1.5.

Construction in Progress

2.1.2.2.2.

Intangible Assets

2.1.2.2.2.1.

2.1.2.2.2.2.

2.1.2.2.2.3.

2.1.2.2.2.4.

2.1.2.2.2.5.

2.1.2.2.3.

2.1.2.2.3.1.

Business Combination Goodwill

2.1.2.2.3.2.

Impairment Testing

2.1.2.2.4.

Long-Term Investments

2.1.2.2.4.1.

Equity Method Investments

2.1.2.2.4.2.

Available-for-Sale Securities

2.1.2.2.4.3.

Held-to-Maturity Securities

2.1.2.2.5.

Deferred Tax Assets

2.1.2.2.5.1.

Temporary Differences

2.1.2.2.5.2.

Tax Loss Carryforwards

2.1.2.2.6.

Other Non-Current Assets

2.1.2.2.6.1.

Long-Term Receivables

2.1.2.2.6.2.

Deposits and Other Assets

2.1.3.

2.1.3.1.

Current Liabilities

2.1.3.1.1.

Accounts Payable

2.1.3.1.1.1.

2.1.3.1.1.2.

Accrued Expenses

2.1.3.1.2.

Short-Term Debt

2.1.3.1.2.1.

2.1.3.1.2.2.

Commercial Paper

2.1.3.1.2.3.

Current Portion of Long-Term Debt

2.1.3.1.3.

Accrued Liabilities

2.1.3.1.3.1.

2.1.3.1.3.2.

Interest Payable

2.1.3.1.3.3.

2.1.3.1.4.

Unearned Revenue

2.1.3.1.4.1.

Advance Customer Payments

2.1.3.1.4.2.

Deferred Revenue

2.1.3.1.5.

Other Current Liabilities

2.1.3.1.5.1.

Dividends Payable

2.1.3.1.5.2.

Warranty Obligations

2.1.3.2.

Non-Current Liabilities

2.1.3.2.1.

2.1.3.2.1.1.

2.1.3.2.1.2.

2.1.3.2.1.3.

Mortgages Payable

2.1.3.2.2.

Deferred Tax Liabilities

2.1.3.2.2.1.

Temporary Differences

2.1.3.2.2.2.

Future Tax Obligations

2.1.3.2.3.

Pension and Post-Employment Benefits

2.1.3.2.3.1.

Defined Benefit Obligations

2.1.3.2.3.2.

Other Post-Employment Benefits

2.1.3.2.4.

Lease Liabilities

2.1.3.2.4.1.

Finance Lease Obligations

2.1.3.2.4.2.

Operating Lease Liabilities

2.1.3.2.5.

Other Non-Current Liabilities

2.1.3.2.5.1.

Asset Retirement Obligations

2.1.3.2.5.2.

Long-Term Provisions

2.1.4.

Shareholders Equity

2.1.4.1.

Contributed Capital

2.1.4.1.1.

2.1.4.1.1.1.

2.1.4.1.1.2.

Shares Outstanding

2.1.4.1.2.

Preferred Stock

2.1.4.1.2.1.

Dividend Rights

2.1.4.1.2.2.

Liquidation Preferences

2.1.4.1.3.

Additional Paid-In Capital

2.1.4.1.3.1.

Premium on Stock Issuance

2.1.4.1.3.2.

Stock-Based Compensation

2.1.4.2.

Retained Earnings

2.1.4.2.1.

Accumulated Net Income

2.1.4.2.2.

Dividend Distributions

2.1.4.2.3.

Prior Period Adjustments

2.1.4.3.

Accumulated Other Comprehensive Income

2.1.4.3.1.

Unrealized Investment Gains/Losses

2.1.4.3.2.

Foreign Currency Translation

2.1.4.3.3.

Pension Adjustments

2.1.4.4.

2.1.4.4.1.

Share Repurchases

2.1.4.4.2.

Cost Method Accounting

2.1.5.

Measurement and Valuation

2.1.5.1.

Historical Cost

2.1.5.1.1.

Original Transaction Price

2.1.5.1.2.

Depreciation and Amortization

2.1.5.2.

2.1.5.2.1.

Market-Based Measurements

2.1.5.2.2.

Fair Value Hierarchy

2.1.5.3.

Net Realizable Value

2.1.5.3.1.

Expected Selling Price

2.1.5.3.2.

Less Costs to Sell

2.1.5.4.

2.1.5.4.1.

Discounted Future Cash Flows

2.1.5.4.2.

Discount Rate Selection

2.2.

The Income Statement

2.2.1.

Fundamental Concepts

2.2.1.1.

Revenue Recognition Principles

2.2.1.1.1.

Performance Obligations

2.2.1.1.2.

Contract Modifications

2.2.1.1.3.

Variable Consideration

2.2.1.1.4.

Timing of Recognition

2.2.1.2.

Matching Principle

2.2.1.2.1.

Expense Recognition

2.2.1.2.2.

Period Allocation

2.2.1.3.

Accrual vs Cash Basis

2.2.1.3.1.

Timing Differences

2.2.1.3.2.

Impact on Reported Results

2.2.2.

Revenue Components

2.2.2.1.

Operating Revenue

2.2.2.1.1.

Primary Business Activities

2.2.2.1.2.

Recurring Revenue Streams

2.2.2.2.

Non-Operating Revenue

2.2.2.2.1.

Investment Income

2.2.2.2.2.

Gain on Asset Sales

2.2.2.2.3.

2.2.3.

Expense Components

2.2.3.1.

Cost of Goods Sold

2.2.3.1.1.

Direct Materials

2.2.3.1.2.

2.2.3.1.3.

Manufacturing Overhead

2.2.3.1.4.

Service Delivery Costs

2.2.3.2.

Operating Expenses

2.2.3.2.1.

Selling Expenses

2.2.3.2.1.1.

Sales Commissions

2.2.3.2.1.2.

Advertising and Marketing

2.2.3.2.1.3.

Distribution Costs

2.2.3.2.2.

General and Administrative Expenses

2.2.3.2.2.1.

Management Salaries

2.2.3.2.2.2.

Office Expenses

2.2.3.2.2.3.

Professional Fees

2.2.3.2.3.

Research and Development

2.2.3.2.3.1.

Product Development

2.2.3.2.3.2.

Technology Innovation

2.2.3.2.4.

Depreciation and Amortization

2.2.3.2.4.1.

Asset Depreciation

2.2.3.2.4.2.

Intangible Amortization

2.2.3.3.

Non-Operating Expenses

2.2.3.3.1.

Interest Expense

2.2.3.3.1.1.

Debt Service Costs

2.2.3.3.1.2.

Finance Charges

2.2.3.3.2.

Loss on Asset Disposal

2.2.3.3.3.

2.2.4.

Income Statement Formats

2.2.4.1.

Single-Step Format

2.2.4.1.1.

Revenue Grouping

2.2.4.1.2.

Expense Grouping

2.2.4.1.3.

Net Income Calculation

2.2.4.2.

Multi-Step Format

2.2.4.2.1.

Gross Profit Calculation

2.2.4.2.2.

Operating Income Subtotal

2.2.4.2.3.

2.2.4.2.4.

2.2.5.

Key Performance Measures

2.2.5.1.

2.2.5.1.1.

Revenue Less COGS

2.2.5.1.2.

Gross Margin Analysis

2.2.5.2.

Operating Income

2.2.5.2.1.

Earnings Before Interest and Tax

2.2.5.2.2.

Core Business Performance

2.2.5.3.

2.2.5.3.1.

Bottom Line Profitability

2.2.5.3.2.

Earnings Per Share

2.2.5.4.

Comprehensive Income

2.2.5.4.1.

Net Income Plus OCI

2.2.5.4.2.

Total Change in Equity

2.3.

The Statement of Cash Flows

2.3.1.

Purpose and Structure

2.3.1.1.

Cash Flow vs Net Income

2.3.1.1.1.

Timing Differences

2.3.1.1.2.

2.3.1.2.

Three Activity Categories

2.3.1.2.1.

Operating Activities

2.3.1.2.2.

Investing Activities

2.3.1.2.3.

Financing Activities

2.3.2.

Operating Activities

2.3.2.1.

2.3.2.1.1.

Cash Receipts from Customers

2.3.2.1.2.

Cash Payments to Suppliers

2.3.2.1.3.

Cash Payments to Employees

2.3.2.1.4.

Cash Payments for Operating Expenses

2.3.2.1.5.

Cash Payments for Interest and Taxes

2.3.2.2.

Indirect Method

2.3.2.2.1.

Starting with Net Income

2.3.2.2.2.

Adjusting for Non-Cash Items

2.3.2.2.2.1.

Depreciation and Amortization

2.3.2.2.2.2.

Stock-Based Compensation

2.3.2.2.2.3.

2.3.2.2.3.

Adjusting for Working Capital Changes

2.3.2.2.3.1.

Accounts Receivable Changes

2.3.2.2.3.2.

Inventory Changes

2.3.2.2.3.3.

Accounts Payable Changes

2.3.2.2.3.4.

Accrued Liabilities Changes

2.3.3.

Investing Activities

2.3.3.1.

Capital Expenditures

2.3.3.1.1.

Property Plant Equipment Purchases

2.3.3.1.2.

Asset Disposals

2.3.3.2.

Investment Transactions

2.3.3.2.1.

Purchase of Securities

2.3.3.2.2.

Sale of Securities

2.3.3.3.

Business Combinations

2.3.3.3.1.

2.3.3.3.2.

2.3.4.

Financing Activities

2.3.4.1.

Debt Transactions

2.3.4.1.1.

2.3.4.1.2.

2.3.4.1.3.

Interest Payments

2.3.4.2.

Equity Transactions

2.3.4.2.1.

2.3.4.2.2.

Share Repurchases

2.3.4.2.3.

Dividend Payments

2.3.5.

Supplemental Disclosures

2.3.5.1.

Non-Cash Investing and Financing

2.3.5.2.

Cash Paid for Interest and Taxes

2.3.5.3.

Significant Assumptions

2.4.

Statement of Changes in Equity

2.4.1.

Components and Movement

2.4.1.1.

Beginning Balances

2.4.1.2.

Net Income Impact

2.4.1.3.

Other Comprehensive Income

2.4.1.4.

Dividend Distributions

2.4.1.5.

Share Transactions

2.4.1.6.

Ending Balances

2.4.2.

Reconciliation Process

2.4.2.1.

Each Equity Component

2.4.2.2.

Total Equity Changes

2.4.2.3.

Cross-References to Other Statements

2.5.

Notes to Financial Statements

2.5.1.

Accounting Policies

2.5.1.1.

Revenue Recognition

2.5.1.2.

Inventory Valuation

2.5.1.3.

Depreciation Methods

2.5.1.4.

Foreign Currency Translation

2.5.2.

Significant Estimates and Judgments

2.5.2.1.

Allowance for Doubtful Accounts

2.5.2.2.

Inventory Obsolescence

2.5.2.3.

Asset Impairment

2.5.2.4.

Contingent Liabilities

2.5.3.

Detailed Disclosures

2.5.3.1.

Debt Terms and Covenants

2.5.3.2.

Lease Commitments

2.5.3.3.

Employee Benefits

2.5.3.4.

Related Party Transactions

2.5.3.5.

Subsequent Events

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3. Analytical Tools and Techniques