1. FINA321 – Fall 2016 University of Nizwa Abdullah Al Shukaili
Week 1 Part 2
FINA321 – Fall 2016
University of Nizwa
Abdullah Al Shukaili

2. Company value, or intrinsic value, is estimated using a
valuation model. Inputs to the valuation model include estimates of future payoffs
(prospective cash flows or earnings) and the cost of capital. The process of forecasting
future payoffs is called prospective analysis. To accurately forecast future payoffs, it is important
to evaluate both the company’s business prospects and its financial statements.
Evaluation of business prospects is a major goal of business environment and strategy
analysis. A company’s financial status is assessed from its financial statements using financial analysis

3. Business Environment and Strategy Analysis
1- Industry analysis: is the usual first step since the prospects and structure of its industry largely drive a company’s profitability
2- Accounting Analysis: Accounting analysis includes evaluation of a company’s earnings quality or, more
broadly, its accounting quality.
Evaluation of earnings quality requires analysis of factors
such as a company’s business, its accounting policies, the quantity and quality of information disclosed, the performance and reputation of management, and the opportunities and incentives for earnings management

4. Business Environment and Strategy Analysis
3- Financial Analysis: is the use of financial statements to analyze a company’s financial position and performance, and to assess future financial performance
Financial analysis consists of three broad areas profitability analysis, risk analysis, and analysis of sources and uses of funds

5. 3- Financial Analysis
Profitability analysis is the evaluation of a company’s return on investment.
It focuses on a company’s sources and levels of profits and involves identifying and measuring the impact of various profitability drivers earnings.
Risk analysis is the evaluation of a company’s ability to meet its commitments. Risk analysis involves assessing the solvency and liquidity of a company along with its earnings variability.

6. 4- Prospective Analysis
Prospective analysis is the forecasting of future payoffs—typically earnings, cash flows,
or both.
This analysis draws on accounting analysis, financial analysis, and business environment and strategy analysis

7. Components of FS

8. Financial Statements 1- Balance Sheet
Assets = Liabilities + Equity
Assets = resources controlled by a company
Liabilities = are funding from creditors and represent obligations of a company or, alternatively, claims of creditors on assets
Equity (or shareholders’ equity) =
Contributed Capital + retained earnings

9. Financial Statements 1- Balance Sheet
Assets and liabilities are separated into current and noncurrent amounts
Current assets are expected to be converted to cash or used in operations within one year (CA)
Current liabilities are obligations the company
is expected to settle within one year ( CL)
working capital = CA - CL

10. Exercise 1 Look to the following BS and fill the gap.
Then look to the right answer in the following slide

13. Working capital ( WC) In 2006 , the CA = 3,301 the CL = 3,469.1
So the WC = (168.1)

14. Financial Statements 2- Income Statement
An income statement measures a company’s financial performance between balance sheet dates. It is a representation of the operating activities of a company
Gross profit (also called gross margin) is the difference between sales and cost of sales (also called cost of goods sold).
Earnings from operations refers to the difference between sales and all operating costs and expenses. It usually excludes financing costs (interest) and taxes

15. Financial Statements 2- Income Statement
accrual basis: revenues are recognized when a company sells goods or services regardless of when it receives cash
Example: Company X sold goods on Sep 11 and received OMR 1000 cash, but has also sold goods on Sep 20 for OMR 2000 and still not received. How much be the total revenue by the end of Sep?

17. Financial Statements 3- Statement of Cash Flows
The statement of cash flows reports cash inflows and outflows separately for a company’s operating, investing, and financing activities over a period of time

20. Exercise 2 ANALYSIS VIEWPOINT . . . YOU ARE THE INVESTOR
You are considering buying Oman Flour Company stock. As part of your preliminary review of Oman Flour Company, you examine its financial statements. What information are you attempting to obtain from each of these statements to aid in your decision?

21. Reading Text book ( ch1) pp. 20 – 26
Notes will be given in the class about some brief description of Income Statement and Balance Sheet

22. Exercise 3 Describe business analysis and identify its objectives?
What are the main differences between credit analysis and equity analysis? How do these impact the financial statement information that is important for each type of analysis?
Describe financial statement analysis and identify its objectives.
Identify at least five different internal and external users of financial statements.

23. Exercise 3
5. Explain how financial statements reflect the business activities of a company? 6. Identify and discuss three primary financial statements of a business 7. Explain why financial statements are important to the decision-making process in financial analysis.