Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2 (Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2.pdf), страница 7

Assuming the properreporting, there is significant information in the tax return,which should be certified as aconformed, or exact, copy.Spreading the Financial StatementsBasically, statement spreading the process by which financial statements is recorded is recorded an astandard form, or spreadsheet. Many banks use a standard spreadsheet for income statements, balance sheets,and statements of cash flows. Use of a spreadsheet enables the analyst to review a number of years all atonce, to spot trends in the company's account balances, and to make comparisons.Since the key to successful financial statement analysis lies in the credit analyst's ability to determine notsimply what has happened in the past or even why it happened, but what it bodes for the future, all availablefinancial information needs to be interpreted and integrated.

However, it cannot be overemphasized thatfinancial statement analysis does not purport to be an exact science that can be used to predict with certaintya company's future. Unknown factors abound, and subjective judgment is necessarily involved in drawingconclusions from the analyzed data and making the final credit decision.Balance Sheet AnalysisThe balance sheet is the first part of the financial statements to be analyzed in this text. It is a point-intime financial picture of the company-usually as of the last day of the company's fiscal year. The basicstructure of the balance sheet can be stated as a simple equation:Assets = Liabilities + Net worth.Balance sheet analysis entails an evaluation of the company's assets followed by an evaluation of itsliabilities (debt) and, the difference between the two, its net worth (or equity ).Income Statement AnalysisNext to be analyzed is the income statement also called a profit and loss statement or earnings statement.One of the most important sources of information about a company, it begins with total revenues (or sales)and then categorizes the various expenses leading to the net profit (or loss) for the period.

The accountant'sgoal is to analyze the net profit or net income, that is, to estimate the wealth generated by the firm during theperiod. The analysis consists of examining the quality and consistency of revenue and truthfulness of theexpenses.Statement of Cash Flow AnalysisThe third financial statement to be analyzed is the statement of cash flow (stemming from the sources anduses, of funds statement and, its predecessor, the sources and applications of funds statement).

As its nameimplies, this model of the company's business operations shows how a company obtains and uses its cashresources, ignoring the accrual accounting, wealth-generating model.Since debt is repaid with cash, the statement of cash flow helps-'the' lender determine both the company'sfunding needs and its sources of repayment. The statement of cash flow shows in-; flows and outflows ofcash categorized as operating funds flows, investing activities, and 'financing activities.

Like an incomestatement, it is dynamic (normally covering a fiscal year).Every client should be required to submit as part of its financial documentation a statement of cash flowsprepared, if possible, in accordance with the Statement of Financial Accounting Standards (SFAS) No.95.Some clients, especially those submitting statements that have not been reviewed by outside auditors, can not17or will not prepare a statement of cash How. In this case the analyst may approximate the information hi thespreading process.Ratio AnalysisRatios are not only the best known and most widely used of all the financial statement analysis tools, theyare also the most overrated and most widely used.

Ratios allow the lender to study the relationship and trendsover time between various components of financial statements, such as assets and liabilities or expenses andrevenues. While ratios are easily calculated, their correct interpretation is more problematic. The specificratios used by a particular bank may vary, but the major categories of ratios reflect the major aspects of acompany's operations that a lender needs to consider. Liquidity — the ability to meet current obligations and convert assets to cash, Leverage — the relationship between liabilities and the company's net worth. Solvency, or Coverage — the company's capacity to meet its continuing paymentobligations. Profitability — the company's ability to sell its products or provide a service at a price that exceeds its expenses. Activity — the efficiency with which a company uses its assets (which will vary over tune.

particularlyfor a company that is cyclical in nature).Trend AnalysisDetermining trends and making industry comparisons are two basic analytical techniques that will bediscussed in detail throughout the text. Trend analysis compares information over comparable periods or atcomparable tunes for the same company. It is used to detect favorable or unfavorable changes in operatingpolicies as reflected in revenues, expenses, and asset or liability accounts.Comparative AnalysisComparative analysis parallels the ratios and other financial information of at least two companies,preferably of the same size and industry.

This allows the analyst to draw conclusions about the relativeperformance of the firms. By using the Annual Statement Studies by Robert Morris Associates, many firmsmay be matched to the subject firm and statistical conclusions drawn.Preparing ForecastsForecasts are basic to the loan analysis and put into numerical form something that the granting of any loanimplicitly assumes-that the borrower will be able to repay the principal. Two tools used in this analysis areshort-term and long-term forecasts. Some analysts call them cash budgets and pro formas, the latter termbeing used especially to describe a one-year forecast of the three financial statements.The types of projections shown herein forecast the future based upon the technique of percentage of salesrelationships: everything is forecast based upon its historic relationship to sales.

Therefore,- the entire forecastis predicated on (1) an accurate-as-possible prediction of the sales levels and (2) the company's operatingstructure not changing in ways that disturb the historical relationships between sales and expenses or assetlevels, as identified by the analyst.Cash BudgetThe cash budget is an important financial statement analysis tool. Presented in the form of a one-yearfinancial forecast, a cash budget forecasts a company's, cash receipts and payments, generally on a month-tomonth basis. The cash budget enables the lender to gauge a business's peak credit needs and its ability togenerate sufficient cash to repay short-term loans over the term of its operating cycle, the cash budget alsohelps a lender determine whether, a company's borrowing needs are long term or short term.

Cash budgets areespecially useful .in determining the financial needs of borrowers with seasonal operating cycles (such as atoy store that rings up half of its total sales in the last two months of each year).18Long-term ForecastsThe examination of three- to five-year forecasts of income statements and balance sheets forces the analystto apply what has been learned from analysis of the historical financial statements to the future, given anestimated level of sales. Examination of a company-provided forecast involves evaluating the company'sunderlying assumptions as well as the expected economic, competitive, and regulatory environment in whichthe company will operate.Other Advanced Analytical TechniquesBesides the essential analytical tools described above, several more-advanced analytical techniques areavailable. These techniques include: working investment analysis, which measures the impact of sales growth on financing requirementsand a company's ability to expand sales; sustainable growth analysis, which measures a company's ability to expand its sales withoutchanging its proportional use of debt; sensitivity analysis, which uses multiple scenarios to examine a company's areas of greatestvulnerability, and industry factor, which considers the variability of the borrowing firm's cash flows by comparing themto the cash flows of other companies in its industryThese techniques are invaluable in reining and focusing the financial statement analysis process and inevaluating a company's ability to grow.

With practice, credit analysts will gain skill in using them and ininterpreting the results as well as in determining what types of advanced analysis are useful in a particularsituation.Accounting MethodsGenerally accepted accounting principles (GAAP) prescribe methods of reporting accounting or financialinformation in order to facilitate comparisons among companies. Nevertheless, in preparing financial statements, many different accounting techniques are accepted. For example, financial statements can be preparedon a cash or an accrual basis, using LIFO (last in, first out) or FIFO (first in, first out) inventory valuationmethods, and using accelerated depreciation or straight-line depreciation of fixed assets.Although the accounting methods used are usually described in the footnotes to accountant-preparedfinancial statements, differences in accounting methods can make it difficult to make valid comparisons evenbetween companies in the same industry. Comparing financial statements of a company over time may alsoyield invalid conclusions if the company has changed any of its accounting methods during the period beinganalyzed.