Essentials of Financial Statement Analysis - 3384 Words

Chapter 5: Essentials of Financial Statement Analysis Evaluating accounting â€Å"quality† ï  ® ï  ® How do we define financial reporting quality? Qualitative characteristics of accounting Information: ï  ± ï  ± ï  ± ï  ± ï  ± ï  ± Understandability Decision usefulness Reliability Relevance Consistency Comparability 1 Attributes of High Quality Financial Reporting ï  ® Financial reporting (earnings) quality has been considered positively associated with the following: ï  ± High persistence of earnings and cash flows ï  ± High predictive ability of earnings and cash flows ï  ± High earnings response coefficient ï  ± Low level of earnings management ï  ± More voluntarily disclosure ï  ± Strong corporate governance 2 Manipulating Income and Earnings Management ï  ® ï  ®Ã¢â‚¬ ¦show more content†¦Cross-sectional analysis: Identify similarities and differences across companies at a single moment in time. Benchmark comparison: measures a company’s performance against some predetermined standard. 13 Getting behind the numbers: Case Study: Krispy Kreme Doughnuts, Inc. ï  ® Established in 1937. Today has more than 290 doughnut stores (companyowned plus franchised) throughout the U.S. Serves more than 7.5 million doughnuts every day. Strong earnings and consistent sales growth. 70% 60% 50% 40% 30% 20% 10% 0% Compnay stores Sales to franchisees Royalties 31% 65% ï  ® ï  ® 4% ï  ® Revenue sources in 2002 14 Comparative Income Statements: Krispy Kreme’s Financials Systemwide sales Include sales from company owned and franchised stores. Includes a $5.733 million after-tax special charge for business dispute Includes a $9.1 million charge to settle a business dispute Sales increased from $220.2 million in 1999 to $491.5 million in 2002. Net income increased from $6 million in 1999 to $33.5 million in 2002. 15 Common Size Income Statements: Statements Krispy Kreme’s Financials: Apply the analysis tool (Common Size statement) to Income $393.7 operation expenses $491.5 sales * Not adjusted for distortions caused by â€Å"special items†. Each statement item is computed as a percentage of sales. 16 Trend Income Statements: Statement Krispy Kreme’s Financials: Apply the analysis tool (Trend statement) to IncomeShow MoreRelatedRatio and Financial Ratio Analyisis1712 Words   |  7 PagesRatio and Financial Statements Analysis Kimberly Y. Gruber University of Maryland University College Dr. Sunando Sengupta 07/25/2013 Turnitin Score: 23% Executive Summary The purpose of this paper is to examine ratio and financial statement analysis. 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