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FINANCIALIANALYSIS AND PLANNING NTRODUCTION

CHAPTER 2

REVIEW OF ACCOUNTING

CHAPTER 3

FINANCIAL ANALYSIS

CHAPTER 4

FINANCIAL FORECASTING

CHAPTER 5

OPERATING AND FINANCIAL LEVERAGE

Understanding and utilizing financial statements for the analysis of the firm’s performance, for comprehending the dynamics revealed within the balance sheet, and for forecasting the future financial situation of the firm are key skills required of the financial manager.

Review of Accounting

LEARNING OBJECTIVES

1 Demonstrate a reasonable ability to prepare the three basic financial statements. 2 Examine the limitations of the income statement as a measure of a firm’s profitability. 3 Examine the limitations of the balance sheet as a measure of a firm’s financial position. 4 Explain the importance of cash flows as identified in the statement of cash flows. 5 Outline the effect of corporate tax considerations on aftertax cash flow. 6 Identify the different forms of investment income and the different taxes payable on this income. 7 Explain the concept of tax savings.

The language of finance flows logically from accounting. To be adequately prepared to study the concepts of finance, it is necessary to comprehend the material drawn from the accounting area. Although our focus in finance is decision making that seeks to produce value today from future expected cash flows, it is important to understand where a firm has been and where it is at the present time. Financial statements help us to understand this. Much of the early frustration suffered by students who have difficulty with finance can

be overcome if such concepts as retained earnings, shareholders’ equity, amortization, and historical/replacement cost accounting are brought into focus. This chapter examines the three basic types of financial statements—the income statement, the balance sheet, and the statement of cash flows—with particular attention paid to the interrelationships among these three measurement devices. The...