D366 Condensed Exam Guide
Financial Statement Analysis
(Western Governors University)
, D366 Condensed Exam Guide
1. Evaluating Quality
• Key Ideas: Is the info trustworthy?
• Terms to know:
o Transitory income, peripheral activity, contingent income
o Accruals, earnings management (real vs. accounting)
o SPEs, goodwill, fair value vs. historical cost
• Red flags: Big one-time items, sudden accrual spikes, aggressive accounting, off-
balance sheet SPEs.
2. Analyzing Performance
• Statements:
o Common-size (all % of total assets/revenue).
o Percentage change (year-over-year growth).
• Ratios (must know):
o Liquidity: Current = CA/CL, Quick = (CA–Inv)/CL, OCF/CL.
o Profitability: ROA = NI/TA, ROCE = (NI–Pref Div)/Avg Eq, EPS =
NI/shares, GMI = GM_t / GM_t-1.
o Efficiency: Inv. Turnover = COGS/Avg Inv; Days in Inv = Days/Turnover.
o Solvency: Debt/Equity, Interest Coverage = EBIT/Interest.
• Nonfinancials: Market share, employee turnover, customer loyalty.
• Frameworks:
o Business cycle (Intro → Growth → Maturity → Decline).
o Porter’s Five Forces (suppliers, buyers, rivalry, new entrants, substitutes).
3. Explaining Value
• Valuation approaches:
o Asset-based (Assets–Liabilities).
o Relative (P/E, P/S, EV/EBITDA).
o Intrinsic (DCF → PV of FCFE, Continuing Value = FCF × (1+g)/(WACC–g)).
• Formulas:
o EV = Mkt Cap + Debt – Cash.
o PV = FV/(1+r)^n.
o FCFE = NI + D&A – ΔNWC – CapEx + Net Borrowing.
• Market Caps: Small (250M–2B), Mid (2–10B), Large (10B+).
Financial Statement Analysis
(Western Governors University)
, D366 Condensed Exam Guide
1. Evaluating Quality
• Key Ideas: Is the info trustworthy?
• Terms to know:
o Transitory income, peripheral activity, contingent income
o Accruals, earnings management (real vs. accounting)
o SPEs, goodwill, fair value vs. historical cost
• Red flags: Big one-time items, sudden accrual spikes, aggressive accounting, off-
balance sheet SPEs.
2. Analyzing Performance
• Statements:
o Common-size (all % of total assets/revenue).
o Percentage change (year-over-year growth).
• Ratios (must know):
o Liquidity: Current = CA/CL, Quick = (CA–Inv)/CL, OCF/CL.
o Profitability: ROA = NI/TA, ROCE = (NI–Pref Div)/Avg Eq, EPS =
NI/shares, GMI = GM_t / GM_t-1.
o Efficiency: Inv. Turnover = COGS/Avg Inv; Days in Inv = Days/Turnover.
o Solvency: Debt/Equity, Interest Coverage = EBIT/Interest.
• Nonfinancials: Market share, employee turnover, customer loyalty.
• Frameworks:
o Business cycle (Intro → Growth → Maturity → Decline).
o Porter’s Five Forces (suppliers, buyers, rivalry, new entrants, substitutes).
3. Explaining Value
• Valuation approaches:
o Asset-based (Assets–Liabilities).
o Relative (P/E, P/S, EV/EBITDA).
o Intrinsic (DCF → PV of FCFE, Continuing Value = FCF × (1+g)/(WACC–g)).
• Formulas:
o EV = Mkt Cap + Debt – Cash.
o PV = FV/(1+r)^n.
o FCFE = NI + D&A – ΔNWC – CapEx + Net Borrowing.
• Market Caps: Small (250M–2B), Mid (2–10B), Large (10B+).
