Module C Financial Statement Analysis: Investing Activities.

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Presentation transcript:

Module C Financial Statement Analysis: Investing Activities

Topics –Review cash flows and other financial statement effects related to investments in debt and equity securities –Review cash flows and other financial statement effects related to investments in long-lived operational assets –Understand effects of investments on the financial ratios identified in Module A

–Learn the balance sheet and income statement [pro forma informal] adjustments made by many financial analysts in the process of analyzing the effects of investments on the profitability and risk of the firm –Identify the quality of earnings [pro forma informal] adjustments made by analysts in the area of gains and losses on investment transactions

Review Cash Flows and Other Financial Statement Effects Related to Investments in Debt and Equity Securities Investments in debt and equity securities –Statement of cash flows Trading securities viewed as operating activities All other investments viewed as investing activities

–Income statement Dividends on stock investments viewed as operating activities –Exception: Dividends on investments accounted for using the equity method do not affect income, but, instead, reduce investment. Interest on debt investments viewed as operating activities Unrealized gains/losses on trading securities affect net income.

–Statement of comprehensive income Unrealized gains/losses on available-for-sale securities are reported as other comprehensive income

Review Cash Flows and Other Financial Statement Effects Related to Investments in Long-lived Operational Assets Statement of Cash Flows –Transactions reported as investing activities

Income statement –Affected by depreciation and amortization expense –Research and development costs are expensed –Interest cost on long-lived construction in process is capitalized Balance Sheet –Reports unallocated historical cost Exception: PP&E items periodically must be assessed for possible impairment

Understand Effects of Investments on the Financial Ratios Identified in Module A Module A ratios reviewed include –ROA Net profit margin ratio Asset turnover ratio Compared to WHAT?

–Short-term liquidity risk Current ratio Quick ratio –Long-term solvency risk Operating cash flow to capital expenditures ratio Average age of assets in place Compared to WHAT?

Learn the Balance Sheet and Income Statement Adjustments Made by Many Financial Analysts in the Process of Analyzing the Effects of Investments on the Profitability and Risk of the Firm Persistence of gains/losses and long-lived assets sales and writedowns Discretion in unrealized gains and losses on available-for-sale securities (i.e., gains trading)

End of Module C