MGCR 211 Lecture Notes - Lecture 21: Inventory Turnover, Gross Margin, Cash Flow
Document Summary
Financial statements do not reflect the company"s prospects within its business environment: statements are backward looking, not focusing on the future prospects. Financial statements are inherently limited: statements leave out some current and historical information such as human resources and the effects of inflation. Management prepares the financial statements in a biased manner: managers often choose accounting methods and estimates that make them look good. Book value adjustments for (business environment, unrecorded events, management bias) = true value. 5 issues: assessing the business environment, nature of operations, strategy, industry, competitors etc, reading and studying the financial statements and footnotes. Read audit report, analyze important segments, read statements, identify significant transactions: assessing earnings quality, analyzing the financial statements. Comparisons with other statements and across time, within the industry, across countries: predicting future earnings and/or cash flow. Horizontal analysis (trends: a procedure in fundamental analysis in which an analyst compares items in a company"s financial statements over a certain period of time.