Financial Statement Analysis and Valuation 3e Easton (Solutions
Manual All Chapters, 100% Original Verified, A+ Grade)
Module 1
Framework for Analysis and Valuation
DISCUSSION QUESTIONS
Q1-1. Organizations undertake planning activities that shape three major
activities: financing, investing, and operating. Financing is the
means a company uses to pay for resources. Investing refers to
the buying and selling of resources necessary to carry out the
organization’s plans. Operating activities are the actual carrying
out of these plans. Planning is the glue that connects these
activities, including the organization’s ideas, goals and strategies.
Financial accounting information provides valuable input into the
planning process, and, subsequently, reports on the results of
plans so that corrective action can be taken, if necessary.
Q1-2. An organization’s financing activities (liabilities and equity =
sources of funds) pay for investing activities (assets = uses of
funds). An organization’s assets cannot be more or less than its
liabilities and equity combined. This means: assets = liabilities +
equity. This relation is called the accounting equation (sometimes
called the balance sheet equation), and it applies to all
organizations at all times.
.
Solutions Manual, Module 1 1-1
,Q1-3. The four main financial statements are: income statement, balance
sheet, statement of stockholders’ equity, and statement of cash
flows. The income statement provides information about the
company’s revenues, expenses and profitability over a period of
time. The balance sheet lists the company’s assets (what it owns),
liabilities (what it owes), and stockholders’ equity (the residual
claims of its owners) as of a point in time. The statement of
stockholders’ equity reports on the changes to each stockholders’
equity account during the period. The statement of cash flows
identifies the sources (inflows) and uses (outflows) of cash, that
is, where the company got its cash from and what it did with it.
Together, the four statements provide a complete picture of the
financial condition of the company.
Q1-4. The balance sheet provides information that helps users
understand a company’s resources (assets) and claims to those
resources (liabilities and stockholders’ equity) as of a given point
in time.
Q1-5. The income statement covers a period of time. An income
statement reports whether the business has earned a net income
(also called profit or earnings) or incurred a net loss. Importantly,
the income statement lists the types and amounts of revenues and
expenses making up net income or net loss.
Q1-6. The statement of cash flows reports on the cash inflows and
outflows relating to a company’s operating, investing, and
financing activities over a period of time. The sum of these three
activities yields the net change in cash for the period. This
statement is a useful complement to the income statement, which
reports on revenues and expenses, but which conveys relatively
little information about cash flows.
Q1-7. Retained earnings (reported on the balance sheet) is increased
each period by any net income earned during the period (as
reported in the income statement) and decreased each period by
the payment of dividends (as reported in the statement of cash
flows and the statement of stockholders’ equity). Transactions
reflected on the statement of cash flows link the previous period’s
balance sheet to the current period’s balance sheet. The ending
cash balance appears on both the balance sheet and the statement
of cash flows.
.
1-2 Financial Statement Analysis & Valuation, 3rd Edition
,Q1-8. External users and their uses of accounting information include:
(a) lenders for measuring the risk and return of loans; (b)
shareholders for assessing the return and risk in acquiring shares;
and (c) analysts for assessing investment potential. Other users
are auditors, consultants, officers, directors for overseeing
management, employees for judging employment opportunities,
regulators, unions, suppliers, and appraisers.
Q1-9. Forecasting is a method of formally expressing our expectations
of a company's future payoffs. When forecasting company
payoffs, we need to consider the effects of their business
environment on the company's ability to achieve those future
payoffs. Competitive forces as well as opportunities and threats
will impact what the company can pay in the future. This in turn
affects what payoffs are expected. A better understanding of
business environment and accounting information leads to more
accurate forecasts of the future and more reliable valuation
estimates.
Q1-10.A Procter & Gamble’s independent auditor is Deloitte & Touche LLP.
The auditor expressly states that “our responsibility is to express
an opinion on these financial statements based on our audits.”
The auditor also states that “these financial statements are the
responsibility of the company’s management.” Thus, the auditor
does not assume responsibility for the financial statements.
Q1-11.B While firms acknowledge the increasing need for more complete
disclosure of financial and nonfinancial information, they have
resisted these demands to protect their competitive position.
Corporate executives must weigh the benefits they receive from
the financial markets as a result of more transparent and revealing
financial reporting against the costs of divulging proprietary
information to competitors and others.
Q1-12.B Generally Accepted Accounting Principles (GAAP) are the various
methods, rules, practices, and other procedures that have evolved
over time in response to the need to regulate the preparation of
financial statements. They are primarily set by the Financial
Accounting Standards Board (FASB), a private sector entity with
representatives from companies that issue financial statements,
accounting firms that audit those statements, and users of
financial information. Other bodies that contribute to GAAP are the
AICPA, the EITF, and the SEC.
.
Solutions Manual, Module 1 1-3
, Q1-13.B Corporate governance is the system of policies, procedures and
mechanisms that protect the interests of stakeholders in the
business. These stakeholders include investors, creditors,
regulatory bodies, and employees, to name a few. Sound
corporate governance involves the maintenance of an effective
internal auditing function, an independent and effective external
auditing function, an informed and impartial board of directors,
governmental oversight (such as from the SEC), and the oversight
of the courts.
Q1-14.B The auditor’s primary function is to express an opinion as to
whether the financial statements fairly present the financial
condition of the company and are free from material
misstatements. Auditors do not prepare the financial statements;
they only audit them and issue their opinion on them. The
auditors provide no guarantees about the financial statements or
about the company’s continued performance.
Q1-15. Financial accounting information is frequently used in order to
evaluate management performance. The return on equity (ROE)
and return on assets (ROA) provide useful measures of financial
performance as they combine elements from both the income
statement and the balance sheet. Financial accounting information
is also frequently used to monitor compliance with external
contract terms. Banks often set limits on such items as the
amount of total liabilities in relation to stockholders’ equity or the
amount of dividends that a company may pay. Audited financial
statements provide information that can be used to monitor
compliance with these limits (often called covenants). Regulators
and taxing authorities also utilize financial information to monitor
items of interest.
Q1-16. Managers are vitally concerned about disclosing proprietary
information that might benefit the company’s competitors. Of most
concern, is the “cost” of losing some competitive advantage.
There has traditionally been tension between companies and the
financial professionals (especially investment analysts) who press
firms for more and more financial and nonfinancial information.
.
1-4 Financial Statement Analysis & Valuation, 3rd Edition
Manual All Chapters, 100% Original Verified, A+ Grade)
Module 1
Framework for Analysis and Valuation
DISCUSSION QUESTIONS
Q1-1. Organizations undertake planning activities that shape three major
activities: financing, investing, and operating. Financing is the
means a company uses to pay for resources. Investing refers to
the buying and selling of resources necessary to carry out the
organization’s plans. Operating activities are the actual carrying
out of these plans. Planning is the glue that connects these
activities, including the organization’s ideas, goals and strategies.
Financial accounting information provides valuable input into the
planning process, and, subsequently, reports on the results of
plans so that corrective action can be taken, if necessary.
Q1-2. An organization’s financing activities (liabilities and equity =
sources of funds) pay for investing activities (assets = uses of
funds). An organization’s assets cannot be more or less than its
liabilities and equity combined. This means: assets = liabilities +
equity. This relation is called the accounting equation (sometimes
called the balance sheet equation), and it applies to all
organizations at all times.
.
Solutions Manual, Module 1 1-1
,Q1-3. The four main financial statements are: income statement, balance
sheet, statement of stockholders’ equity, and statement of cash
flows. The income statement provides information about the
company’s revenues, expenses and profitability over a period of
time. The balance sheet lists the company’s assets (what it owns),
liabilities (what it owes), and stockholders’ equity (the residual
claims of its owners) as of a point in time. The statement of
stockholders’ equity reports on the changes to each stockholders’
equity account during the period. The statement of cash flows
identifies the sources (inflows) and uses (outflows) of cash, that
is, where the company got its cash from and what it did with it.
Together, the four statements provide a complete picture of the
financial condition of the company.
Q1-4. The balance sheet provides information that helps users
understand a company’s resources (assets) and claims to those
resources (liabilities and stockholders’ equity) as of a given point
in time.
Q1-5. The income statement covers a period of time. An income
statement reports whether the business has earned a net income
(also called profit or earnings) or incurred a net loss. Importantly,
the income statement lists the types and amounts of revenues and
expenses making up net income or net loss.
Q1-6. The statement of cash flows reports on the cash inflows and
outflows relating to a company’s operating, investing, and
financing activities over a period of time. The sum of these three
activities yields the net change in cash for the period. This
statement is a useful complement to the income statement, which
reports on revenues and expenses, but which conveys relatively
little information about cash flows.
Q1-7. Retained earnings (reported on the balance sheet) is increased
each period by any net income earned during the period (as
reported in the income statement) and decreased each period by
the payment of dividends (as reported in the statement of cash
flows and the statement of stockholders’ equity). Transactions
reflected on the statement of cash flows link the previous period’s
balance sheet to the current period’s balance sheet. The ending
cash balance appears on both the balance sheet and the statement
of cash flows.
.
1-2 Financial Statement Analysis & Valuation, 3rd Edition
,Q1-8. External users and their uses of accounting information include:
(a) lenders for measuring the risk and return of loans; (b)
shareholders for assessing the return and risk in acquiring shares;
and (c) analysts for assessing investment potential. Other users
are auditors, consultants, officers, directors for overseeing
management, employees for judging employment opportunities,
regulators, unions, suppliers, and appraisers.
Q1-9. Forecasting is a method of formally expressing our expectations
of a company's future payoffs. When forecasting company
payoffs, we need to consider the effects of their business
environment on the company's ability to achieve those future
payoffs. Competitive forces as well as opportunities and threats
will impact what the company can pay in the future. This in turn
affects what payoffs are expected. A better understanding of
business environment and accounting information leads to more
accurate forecasts of the future and more reliable valuation
estimates.
Q1-10.A Procter & Gamble’s independent auditor is Deloitte & Touche LLP.
The auditor expressly states that “our responsibility is to express
an opinion on these financial statements based on our audits.”
The auditor also states that “these financial statements are the
responsibility of the company’s management.” Thus, the auditor
does not assume responsibility for the financial statements.
Q1-11.B While firms acknowledge the increasing need for more complete
disclosure of financial and nonfinancial information, they have
resisted these demands to protect their competitive position.
Corporate executives must weigh the benefits they receive from
the financial markets as a result of more transparent and revealing
financial reporting against the costs of divulging proprietary
information to competitors and others.
Q1-12.B Generally Accepted Accounting Principles (GAAP) are the various
methods, rules, practices, and other procedures that have evolved
over time in response to the need to regulate the preparation of
financial statements. They are primarily set by the Financial
Accounting Standards Board (FASB), a private sector entity with
representatives from companies that issue financial statements,
accounting firms that audit those statements, and users of
financial information. Other bodies that contribute to GAAP are the
AICPA, the EITF, and the SEC.
.
Solutions Manual, Module 1 1-3
, Q1-13.B Corporate governance is the system of policies, procedures and
mechanisms that protect the interests of stakeholders in the
business. These stakeholders include investors, creditors,
regulatory bodies, and employees, to name a few. Sound
corporate governance involves the maintenance of an effective
internal auditing function, an independent and effective external
auditing function, an informed and impartial board of directors,
governmental oversight (such as from the SEC), and the oversight
of the courts.
Q1-14.B The auditor’s primary function is to express an opinion as to
whether the financial statements fairly present the financial
condition of the company and are free from material
misstatements. Auditors do not prepare the financial statements;
they only audit them and issue their opinion on them. The
auditors provide no guarantees about the financial statements or
about the company’s continued performance.
Q1-15. Financial accounting information is frequently used in order to
evaluate management performance. The return on equity (ROE)
and return on assets (ROA) provide useful measures of financial
performance as they combine elements from both the income
statement and the balance sheet. Financial accounting information
is also frequently used to monitor compliance with external
contract terms. Banks often set limits on such items as the
amount of total liabilities in relation to stockholders’ equity or the
amount of dividends that a company may pay. Audited financial
statements provide information that can be used to monitor
compliance with these limits (often called covenants). Regulators
and taxing authorities also utilize financial information to monitor
items of interest.
Q1-16. Managers are vitally concerned about disclosing proprietary
information that might benefit the company’s competitors. Of most
concern, is the “cost” of losing some competitive advantage.
There has traditionally been tension between companies and the
financial professionals (especially investment analysts) who press
firms for more and more financial and nonfinancial information.
.
1-4 Financial Statement Analysis & Valuation, 3rd Edition
