October 2011

Analyzing Financial Statements — What is your perspective?? — Part2

Analyzing Financial Statements ,What is your perspective, Auditor, analyst, Risk Analyst.

Analyzing and trying to get insights from Financial Statement is one of the most interesting aspect. A Financial Statement can be dissected in many ways. We had looked at three angles or lenses thru which these statements can be looked at: Here are three more ways to look at these statements :

4. AUDITOR

An auditor’s primary objective is an expression of an opinion on the fairness of financial statements according to generally accepted accounting principles.  As auditor, you desire assurance on the absence of errors and irregularities in financial statements.  Financial statement analysis can help identify any errors and irregularities affecting the statements.  Also, this analysis compels our auditor to understand the company’s operations and its performance in light of prevailing economic and industry conditions.  Application of financial statement analysis is especially useful as a preliminary audit tool, directing the auditor to areas of greatest change and unexplained performance.

5 RISK ANALYST

Accounting risk results from the need for judgments, estimates, and impression inherent in the accounting system.  Accounting risk increases our uncertainty in decision making.  Accounting risk also involves accounting conservatism.  Assumptions play an important role in accounting measurements, and these assumptions can be too conservative or optimistic.

6. YOU ARE THE ANALYST/FORECASTER

More persistent earnings reflect recurring, stable, predictable, and operating elements.  Your estimate of earnings persistence should consider these elements.  More persistent earnings comprise recurring operating elements. Finding 40% of earnings from unusual gains implies less persistence because its source is no operating.  You can also question classification of litigation gains as “unusual” – they are sometimes better viewed as extraordinary.  The extraordinary loss component also implies less persistent.  In this case you need to assess whether environmental costs are truly extraordinary for this company’s business.  Together, these components suggest less persistence than suggested by the stable and steady growth trend in aggregate earnings.  This lower persistence should be reflected in both the level and uncertainty of your earnings forecast.

Gaining Insights into an organization’s financial statements is also a matter of perspective. Thus analyzing a company from one of the lenses makes a huge difference!!!!!

September 2011

Porter’s three Generic Business strategies !!!!

If you are in a Business school, invariably you will get references to Porter and theories on Business Strategies. It is Interesting that many theories have come after Porter set out his strategies. However, the simplicity and the power his theories have captured the imagination of Businesses the world over.
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So, presenting here the three business strategies of Porter and typical Organizational Characteristics :

Strategy 1 —>>> Overall Cost Leadership

•Sustained capital investment and access to capital
•Intense supervision of labor
•Tight cost control requiring frequent, detailed control reports
•Low-cost distribution system
•Structured organization and responsibilities
& Products designed for ease in manufacture
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Strategy 2 —>>> Differentiation
•Strong marketing abilities
•Product engineering
•Strong capability in basic research
•Corporate reputation for quality or technological leadership
•Amenities to attract highly skilled labor, scientists, or creative people.
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Strategy 3 —->>>> Focus
•Combination of cost-leadership & differentiation strategy directed at a particular strategic target.
Well that’s that!!!!!! His Five forces… I will put up some other time.

Analyzing Financial Statements — What is your perspective?? — Part1

Analyzing Financial Statements ,What is your perspective,Banker, Investor,Director

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Analyzing and trying to get insights from Financial Statement is one of the most interesting aspect. A Financial Statement can be dissected in many ways. Here are 6 different lenses from which the financial statements can be looked into…..

1. BANKER

A banker is concerned about the company’s ability to satisfy its loan obligations.  Concern about the composition of company’s financing sources is twofold.  First, the greater is owner financing, the lower is a banker’s credit risk.

Second, creditors are also concerned with Adaptec’s other current and future creditor financing.  Creditors often write debt covenants to restrict a company’s future lending, or require collateral in case of default, or limit the amount of dividends payable to shareholders.

2. INVESTOR

As an investor, your review of financial statements focuses on company’s ability to create and maintain future net income.  All the statements are important in your review.  The income statement is especially important as it reveals management’s current and past success in creating and sustaining income.  The cash flow statement is important in assessing management’s ability to meet cash payments and the company’s cash availability. The balance sheet shows Adaptec’s asset base from which future income generated, and reports on liabilities and their due dates to creditors.

3. DIRECTOR

As a member of a company’s board of directors, you are responsible for oversight of management and the safeguarding of shareholders’ interests.  Accordingly, a director’s interest in the company is broad and risky. To reduce risk, a director uses financial statement analysis to monitor management and assess company profitability, growth, and financial condition. Because of a director’s unique position, there is near unlimited access to internal financial and other records.  Analysis of financial statements assists our director in (1) recognizing causal relations among business activities and events, (2) “seeing the forest through the trees,” that is, helping directors focus on the company, and not on a maze of financial details, and (3) encouraging proactive and not reactive measures in confronting changing

—- Continued in Part II