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10/14/2017 APrimeronFinancialStatements

APrimeronFinancialStatements
Muchoftheinformationthatisusedinvaluationandcorporatefinancecomesfromfinancialstatements.An
understandingofthebasicfinancialstatementsandsomeofthefinancialratiosthatareusedinanalysisis
thereforeanecessaryfirststepforeitherpursuit.Thereishoweveradifferencebetweenwhataccountantstryto
measureinfinancialstatements,andwhatfinancialanalystswouldlikethemtomeasure.Someofthisdifference
canbetracedtothedifferencesinobjectivefunctionsaccountantstrytomeasurethecurrentstandingand
immediatepastperformanceofafirm,whereasfinancialanalysisismuchmoreforwardlooking.

Inthisprimer,webeginwithaninventoryoftheinformationwewouldliketoobtainonafirm,andthen
examinehowaccountingstatementsattempttoprovidethisinformation,andwheretheymightfallshort.

InformationalNeeds

Beforelookingataccountingprinciplesandthedetailsofaccountingstatements,letusstartwithamuchmore
fundamentalissue.Whenanalyzingafirm,whatarethequestionstowhichwewouldliketoknowtheanswers?
Todoso,letusrevertbacktothedescriptionofafirm,fromafinancialstandpoint:

Whendoingafinancialanalysisofafirm,wewouldliketobeabletoanswerthefollowingquestions

Whataretheassetsthatthefirmhasinplacealready,andhowmucharetheyworth?
Whatarethegrowthassetsofthefirmandwhatistheirvalue?
Whatisthefirmearningonitsassetsinplace,andwhatcanitexpecttoearnonthesesameassetsaswell
asitsgrowthassets?
Whatisthemixofdebtandequitythatthefirmisusingtofinancetheseassets?

Howmuchriskisthereinthisfirm,andwhatisthecostofitsdebtandequityfinancing?

Aswewillseeinthischapter,accountingstatementsallowustogetsomeinformationonallofthesequestions,
buttheyfallshortintermsofboththetimelinesswithwhichtheyprovidethisinformationandthewayinwhich
theymeasureassetvalue,earningsandrisk.Inthechaptersthatfollow,wewillexaminesomeofthewaysin
whichwecangetbeyondtheselimitations.

HowAccountantsmeasureearnings

Thetwobasicprinciplesthatgovernhowaccountantsmeasureearningsseemtobethefollowing:

Thefirstistheprincipleofaccrualaccounting.Inaccrualbasedaccountingtherevenuefromsellinga
goodorserviceisrecognizedintheperiodinwhichthegoodissoldortheserviceisperformed(inwhole

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orsubstantially).Acorrespondingeffortismadeontheexpensesidetomatchexpensestorevenues.
Thesecondisthecategorizationofexpensesintooperating,financingandcapitalexpenses.Operating
expensesareexpensesthat,atleastintheory,providebenefitsonlyforthecurrentperiodthecostoflabor
andmaterialsexpendedtocreateproductswhicharesoldinthecurrentperiodwouldbeagoodexample.
Financingexpensesareexpensesarisingfromthenonequityfinancingusedtoraisecapitalforthe
businessthemostcommonexampleisinterestexpenses.Capitalexpensesareexpensesthatareexpected
togeneratebenefitsovermultipleperiodsforinstance,thecostofbuyinglandandbuildingsaretreated
ascapitalexpenses.

Theincomestatementiswhereaccountantsattempttomeasurehowprofitableafirmwasduringthefinancial
period.Inthefollowingtable,wesummarizethekeypartsoftheincomestatement,andsomekeymeasurement
issues:

Item AccountingPrinciples IssuesinMeasurement


Revenues Onlyrevenuesfromsalesduringthe Inthecaseofcontractwork,or
periodshouldbeincludedin multiyearprojects,revenuescan
revenues(i.e.,notcashrevenues). bepostedastheworkin
Thus,cashreceivedfromsalesmade completed.
inpreviousperiodsisnotincluded Somefirms,toinflateincomein
insales,andsalesfromthecurrent thecurrentperiod,trytorecordas
period,evenifnotcollected,is muchinsalesbeforetheendofthe
included. period.

(minus)Operating Onlythoseexpensesincurredto Accountingrulesrequirethat


Expenses(not createrevenuesinthecurrentperiod researchanddevelopmentcostsbe
including shouldbeincludedaspartof shownasoperatingexpensesinthe
depreciation) operatingexpenses.Labor,material, periodinwhichtheyareincurred.
marketingandgeneraland (Clearly,thisviolatestheprinciple
administrativecostsarealloperating thatoperatingexpensesshould
expenses.Ifmaterialpurchasedin onlyincludeexpensesdesignedto
thecurrentperiodisnotusedin generaterevenuesinthecurrent
production,itiscarriedoveras period)
inventoryintothenextperiod. Ifassetsareleased,andthelease
qualifiesfortreatmentasan
Inventoryhastobevaluedto operatinglease,thenoperating
estimateoperatingexpenses,and leaseexpensesarealsotreatedas
firmscanchoosetovalueinventory operatingexpenses.
baseduponwhattheypaidforthe Finally,onetimerestructuring
materialboughtattheendofthe chargescanqualifyfortreatmentas
period(FIFO),atthebeginningof operatingexpenses.
theperiod(LIFO)oranaverage
price.
(minus) Anyexpensethatisexpectedto IntheUS,depreciationhastobe
Depreciationand generateincomeovermultiple basedonwhatwasoriginallypaid
Amortization periodsiscalledacapitalexpense. fortheasset(bookvalue).Insome
Acapitalexpenseiswrittenoffover highinflationeconomies,firmsare
itslifetime,andthewriteoffeach allowedtorevalueassets.
yeariscalleddepreciation(ifitisa Theaccountingdepreciationmay
tangibleassetlikemachinery)or bearlittleornoresemblancetothe
amortization(ifitisanintangible economicdepreciation(which
assetsuchasacopyright). measuresthelossinvaluefrom
usingtheasset).

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Sincethevaluethatanassetloses FirmsintheUSareallowedtouse
eachperiodissubjective, differentdepreciationmethodsfor
depreciationschedulesare taxandreportingpurposes.Fortax
mechanized.Theycanbroadlybe purposes,theytendtouse
classifiedintotwogroups accelerateddepreciation(sinceit
straightlinedepreciation,wherean reducestaxableincomeandtaxes).
equalamountgetswrittenoffeach Forreportingpurposes,theytend
period,andaccelerated,wheremore tousestraightlinedepreciation.
oftheassetgetswrittenoffinthe
earlieryearsandlessinlateryears.
=OperatingIncome Whenoperatingexpensesand TotheextentthatR&Dexpenses
(EBIT) depreciationaresubtractedfrom arereallycapitalexpenses,
revenues,weestimateoperating operatingleaseexpensesarereally
income.Thisisdesignedtomeasure financingexpenses,andaccounting
theincomegeneratedbyafirms depreciationisreallynoteconomic
assetsinplace. depreciation,theoperatingincome
canbemisleading.

(minus)Interest Themostdirectsourceofinterest Interestexpensesaretax


Expenses expensesisdebttakenonbythe deductible.Theyneedtobe
firmeitherfromadirectlender subtractedouttoarriveattaxable
(suchasabank)orfrombonds income.
issuedtothepublic.Interest Somefirmshavenoncashinterest
expensesalsoincludeimputed expenses.Whiletheyaretax
interestcomputedonleasesthat deductible,theyneedtobetracked
qualifyascapitalleases. forcashflowpurposes.

Iffirmshavesubstantialinterest
incomefromcashandmarketable
securitiesthattheyhold,itisusually
shownatthispoint.
=TaxableIncome Ifthedepreciationreportedisthe Totheextentthatfirmsuse
taxdepreciation,nettingtheinterest differentapproachesfor
expensesfromtheoperatingincome computation(especiallyfor
shouldyieldthetaxableincome. depreciation)fortaxandreporting
purposes,thetaxableincomeinthe
reportedstatementswillbe
different(andgenerallyhigher)
thanthetaxableincomeinthetax
books.

(minus)Taxes Thesearethetaxesdueandpayable Firmsusuallyreportan"effective"


onincomeinthecurrentperiod. taxratecomputedbydividingthe
Generallyspeaking,itcanbe taxesbythereportedtaxable
computedas income.Sincethereportedtaxable
incomeisusuallyhigherthanthe
Tax=TaxableIncome*TaxRate truetaxableincome,theeffective
taxratewillusuallybelowerthan
thefirmstrueaveragetaxrate.

=NetIncome Theincomeaftertaxesandinterest Ifafirmhaspreferred


isthenetincome. stockholders,thepreferred
dividendwillbesubtractedfrom
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thenetincometoarriveatnet
incometocommonstockholders.

(minus)Losses(+ Theseareexpenses(orincome)not
Profits)not associatedwithoperations.
associatedwith
operations
(minus)Profitsor Changesinaccountingmethods
Lossesassociated (suchashowinventoryisvalued)
withAccounting canresultinearningseffects.
Changes
/NumberofShares Theactualnumberofshares Options,warrantsandconvertibles
outstanding outstandingisreferredtoasprimary areallequity.Justaddingthe
shares.Whenthereareoptionsand sharesthattheholdersofthese
convertiblesoutstanding,theshares optionsareentitledtoisapoorway
embeddedintheseoptionsis ofdealingwiththeclaimsthat
sometimesaddedontoarriveat theseoptionholdershaveonthe
fullydilutedshares. equityofthefirm.

=Earningsper Theearningspersharecanbe
Share computedonaprimaryorfully
dilutedbasis.

HowAccountantsValueAssets

Theassetsofafirmaremeasuredandreportedoninafirmsbalancesheet.Ingeneral,theassetsofafirmcan
becategorizedintofixedassets,currentassets,intangibleassetsandfinancialassets.Thereseemtobethree
basicprinciplesthatunderliehowaccountantsmeasureassetvalue:

AnAbidingBeliefinBookValueastheBestEstimateofValue:Accountingestimatesofassetvaluebegin
withthebookvalue,andunlessasubstantialreasontodootherwiseisgiven,thehistoricalcostisviewed
asthebestestimateofthevalueofanasset.
ADistrustofMarketorEstimatedValue:Whenacurrentmarketvalueexistsforanassetthatisdifferent
fromthebookvalue,accountingconventionseemstoviewthismarketvaluewithsuspicion.Themarket
priceofanassetisoftenviewedasbothmuchtoovolatileandeasilymanipulatedtobeusedasan
estimateofvalueforanasset.Thissuspicionrunsevendeeperwhenvaluesareestimatedforanasset
baseduponexpectedfuturecashflows.
Itisbettertounderestimatevaluethanoverestimateit:Whenthereismorethanoneapproachthatcan
beusedtovalueanasset,accountingconventionseemstotaketheviewthatthemoreconservative
(lower)estimateofvalueshouldbeusedratherthanthelessconservative(higher)estimateofvalue.Thus,
whenbothmarketandbookvalueareavailableforanasset,accountingrulesoftenrequirethatyouuse
thelesserofthetwonumbers.

Theprinciplesgoverningtheaccountingmeasurementofeachoftheseassetcategoriesisprovidedbelow,
togetherwithkeymeasurementissues.

Item Principlesgoverningmeasurement MeasurementIssues


FixedAssets Fixedassetsrefertotangibleassetswithlong Theaccounting
lives.Generallyacceptedaccountingprinciplesin depreciationofanasset
theUnitedStatesrequirethevaluationoffixed followsmechanisticrules
assetsathistoricalcosts,adjustedforany straightline(wherean
estimatedlossinvaluefromtheagingofthese equalamountiswrittenoff
assets.Thelossinvalueiscalleddepreciation. eachyear)oraccelerated.
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Itbearsnoresemblanceto
economicdepreciation.
Inthepresenceofinflation,
theuseofhistoricalcost
canresultinsignificant
undervaluationofolder
fixedassets
Theassetvaluehaslittleor
norelationshiptothe
earningpoweroftheasset.

Current Currentassetsrefertoassetswithshortlives Thediscretiongivenfirms


Assets (generallylessthanayear).Includedhereare onvaluinginventoryand
itemslikeinventoryofbothrawmaterialsand consideringexpectedbad
finishedgoods,accountsreceivableandcash. debtsdoesgiveriseto
gameplaying.During
Theaccountingconventionisforaccounts periodsofinflation,for
receivabletoberecordedastheamountowedto instance,switchingfrom
thefirm,baseduponthebillingatthetimeofthe FIFOtoLIFOwill
creditsale.Firmscansetasideaportionoftheir decreasereportedearnings.
incometocoverexpectedbaddebts,fromcredit Ifinventorychangesare
sales,andaccountsreceivablewillbereducedby onlymadeforreporting
thisreserve. purposes,neitherthetrue
incomeofthefirmnorits
Cashisvaluedatfacevalue,andinventorycanbe cashflowsisaffected.
valuedusingoneofthreeapproachesthecost
ofthematerialsboughtattheendoftheperiod
(FIFO),atthebeginningoftheperiod(LIFO)ora
weightedaverage.
Financial Financialinvestmentsarecategorizedintothree Financialinvestmentshave
Investments types: anobservablemarket
value.Whentheyare
Minority,passiveinvestments:wherethefinancial recordedatbookvalue,
investmentinanotherfirmislessthan20%ofthe andthebookvalueismuch
ownershipofthefirm.Ifthisinvestmentislong lowerthanthemarket
term,itisrecordedatbookvalueandtheinterest value,itdoesseemto
ordividendfromitisshownintheincome suggestthattheyare
statement.Ifitisshortterm,itismarkedto misvalued.
market,andthegainsorlossesrecordedeach
period.

Minority,activeinvestments:wherethefinancial
investmentinanotherfirmisbetween20and50%
oftheownershipofthefirm.Here,theinvestment
isrecordedattheoriginalacquisitioncost,butis
adjustedfortheproportionalshareofprofitsor
lossesmadebythefirmeachperiod.(Equity
approach)

Majority,activeinvestments:wherethefinancial
investmentinanotherfirmisacontrollinginterest.
Here,thefinancialstatementsofthetwofirms
(incomestatementandbalancesheet)havetobe
consolidated.Theentireassetsandliabilitiesofthe
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twofirmsareconsolidated,andtheshareofthe
firmheldbyothersiscalledaminorityinterest.
Intangible Whenonefirmacquiresanotherandthe Goodwillisreallynotan
Assets acquisitionisaccountedforwithpurchase asset.Ifthebookvalue
accounting,thedifferencebetweentheacquisition measuresassetsinplace
priceandthebookvalueoftheacquiredfirmis andthemarketvaluepaid
calledgoodwill.Itisamortizedover40years, isfair,thedifferencereally
thoughtheamortizationisnottaxdeductible. isameasureofgrowth
assets.Whenfirmsoverpay
Whenfirmsacquirepatentsorcopyrightsfrom onacquisitions,goodwill
others,theyareallowedtoshowtheseassetsas mayreflectthe
intangibleassetsonthebalancesheet.The overpaymentmorethan
amortizationoftheseassetsisusuallytax anyintangibleassets
deductible. ownedbythefirm.
Thetreatmentofpatentsas
intangibleassets,when
theyareacquiredfrom
others,doescreatean
inconsistency.When
patentsaredeveloped
throughinternalresearch,
theydonotshowuponthe
balancesheet.

HowAccountantsValueLiabilities

Theprinciplesthatunderliehowaccountantsmeasureliabilitiesandequityarethefollowing:

Thefirstisarigidcategorizationoffinancingintoeitherdebtorequitybaseduponthenatureofthe
obligationcreatedbythefinancing.Foranobligationtoberecognizedasaliability,itmustmeetthree
requirements
Itmustbeexpectedtoleadtoafuturecashoutfloworthelossofafuturecashinflowatsomespecifiedor
determinabledate,
Thefirmcannotavoidtheobligation,and
Thetransactiongivingrisetotheobligationhashappened.

Inkeepingwiththeearlierprincipleofconservatisminestimatingassetvalue,accountantsrecognizeas
liabilitiesonlycashflowobligationsthatcannotbeavoided.Ifanobligationisaresidualobligation,
accountantsseetheobligationasequity.

Thesecondprincipleisthatthevalueofboththeliabilitiesandequityinafirmarebetterestimatedusing
historicalcostswithaccountingadjustments,ratherthanwithexpectedfuturecashflowsormarketvalue.
Theprocessbywhichaccountantsmeasurethevalueofliabilitiesandequitiesisinextricablylinkedto
howtheyvalueassets.Sinceassetsareprimarilyvaluedathistoricalcostorbookvalue,bothdebtand
equityalsogetmeasuredprimarilyatbookvalue.Inthesectionthatfollows,wewillexaminethe
accountingmeasurementofbothliabilitiesandequity.

Inthefollowingtable,wesummarizehowaccountantsmeasureliabilitiesandequity:

Item Howitismeasured MeasurementIssues


Current Currentliabilitiesrefertoliabilities Ingeneral,currentliabilitiesshouldbe
Liabilities thatwillcomedueinthenextyear. recordedatvaluesclosetothetrue
Itincludesshorttermdebt,accounts value.
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andsalariespayable,aswellaslong
termdebtcomingdueinthenext
year.Theseamountsreflectthe
actualamountsdue,andshouldbe
fairlyclosetomarketvalue.
LongTerm Thiscanincludebothlongterm Wheninterestratesincreaseafterlong
Debt bankdebtandcorporatebonds termdebtisissued,thedebtreportedon
outstanding.Accountantsmeasure thebookswillbehigherthantheactual
thevalueoflongtermdebtby marketvalueofthedebt.Thebook
lookingatthepresentvalueof valuewillbelowerthanmarketvalueif
paymentsdueontheloanorbondat interestratesdecreaseafterthedebtis
thetimeoftheborrowing,usingthe borrowed.
interestrateatthetimeofthe Whendebtisissuedinaforeign
borrowing.Thepresentvalueisnot currency,thevaluehastobeadjustedto
recomputed,however,asinterest reflectchangesinexchangerates.
rateschangeaftertheborrowing. Whendebtisconvertible,thedebtis
shownatbookvalue.Whenitis
converted,itistreatedasequity.

OtherLong Therearethreeprimaryitemsthat Theselongtermliabilities,unlikelong


Term gointothis.First,ifleasesqualify termdebt,arenotinterestbearing.
Liabilities fortreatmentascapitalleases,the Whiletheymayrepresentliabilitiesin
presentvalueofleasepaymentsis thebroadestsense,theabsenceofacash
shownaslongtermdebt.Second,if flowclaimimpliesthatweshouldbe
afirmsdefinedbenefitpensionplan cautiousabouttreatingitasdebt.Itis
orhealthcareplanisunderfunded, alsonotclearwhatclaimstheseclaim
theunderfundingisshownasalong holderswouldhave,ifthefirmfailedto
termliabilitiy.Third,ifafirmhas meetitsobligations.
managedtodefertaxesonincome
(forinstance,bytheuseof
accelerateddepreciationand
favorableinventoryvaluation
methods),thedeferredtaxesis
shownasaliabilitiy.
PreferredStock Preferredstockgenerallycomes Accountantshavehistoricallytreated
withafixeddividend.Insome preferredstockasquasiequityoreven
cases,thedividendiscumulatedand asequity.Theyresttheirargumentson
paid,ifthefirmfailsonits thefactsthatpreferredstockholders
obligations.Preferredstockis cannotforceafirmintodefault,andthat
valuedonthebalancesheetatits ithasnofinitelife.Toafinancial
originalissueprice,withany analyst,preferredstocklookslikevery
cumulatedunpaiddividendsadded expensive,unsecureddebt.
on.Convertiblepreferredstockis
treatedsimilarly,butitistreatedas
equityonconversion.
Common Theaccountingmeasureofequityis Whencompaniesbuybackstockfor
Equity ahistoricalcostmeasure.Thevalue shortperiods,withtheintentof
ofequityshownonthebalance reissuingthestockorusingittocover
sheetreflectstheoriginalproceeds optionexercises,theyareallowedto
receivedbythefirmwhenitissued showtherepurchasedstockastreasury
theequity,augmentedbyany stock,whichreducesthebookvalueof
earningsmadesince(orreducedby equity.Firmsarenotallowedtokeep
losses,ifany)andreducedbyany treasurystockonthebooksforextended
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dividendspaidoutduringthe period,andhavetoreducetheirbook
period. valueofequitybythevalueof
repurchasedstockinthecaseofactions
suchasstockbuybacks.Sincethese
buybacksoccuratthecurrentmarket
price,theycanresultinsignificant
reductionsinthebookvalueofequity.
Firmsthathavesignificantlossesover
extendedperiodsorcarryoutmassive
stockbuybackscanendupwith
negativebookvaluesofequity.

HowAccountantsMeasureProfitability

Whiletheincomestatementallowsustoestimatehowprofitableafirminabsoluteterms,itisjustasimportant
thatwegaugetheprofitabilityofthefirmisintermsofpercentagereturns.Therearetwobasicgaugesusedto
measureprofitability.Oneistoexaminetheprofitabilityrelativetothecapitalemployedtogetarateofreturn
oninvestment.Thiscanbedoneeitherfromtheviewpointofjusttheequityinvestors,orlookingattheentire
firm.Anotheristoexamineprofitabilityrelativetosales,byestimatingaprofitmargin.

Thefollowingtablesummarizeswidelyusedaccountingprofitabilitymeasures,withmeasurementissuesthat
comeupwitheach.

Measure Definition Remarks


Returnon EBIT(1taxrate)/ Ifoperatingincomeisused(ratherthanaftertax
Capital (BookValueofDebt+ operatingincome,thisbecomesapretaxreturnon
BookValueofEquity) capital
Thebookvalueofcapitalisusedasameasureof
capitalinvestedinthefirm.Totheextentthatthe
bookvalueisnotareasonableestimateofthisvalue,
thereturnoncapitalwillbemisestimated.

Returnon EBIT(1taxrate)/ Thedistinctionbetweenassetsandcapitalliesin


Assets (BookValueofAssets) currentliabilities,sincethelatterdoesnotincludeit.
Infinance,thereturnoncapitalcanbecomparedto
thecostofcapitalbutthereturnonassetscannot.

Returnon NetIncome/Book Thisbecomesameasureoftheprofitabilityofthe


Equity ValueofEquity equityinvestedinthefirm.
Afirmcanincreaseitsreturnonequitybyraising
netincomeorloweringthebookvalueofequity.
(Thelattercanhappenwhenstockisboughtback)
Insomecases,thebookvalueofequitycanbecome
negative(afterextendedlosses).Thereturnon
equitycannolongerbecomputedforthesefirms.

NetMargin NetIncome/Sales Thismeasurestheaverageprofitearnedbyafirmon


adollarofsales.
Sinceitisafterfinancialexpenses,itwillbelower
forhighlyleveredfirms.

Operating EBIT(1taxrate)/ Thisratio,sinceitisbaseduponincomepriorto


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Margin Sales interestexpenses,ismuchmorecomparableacross


firmsofdifferentleverage.

HowAccountantsMeasureLeverage

Accountantsmeasureleverage,notsurprisingly,usingtheirbookvaluemeasuresofdebtandequity.Inthe
followingtable,wesummarizethemostwidelyusedratiosformeasuringleverageinaccounting.

LeverageMeasure Definition Remarks


Debt/Capital BookValueofDebt/(BookValue Boththeseratiosaredesignedto
ofDebt+BookValueofEquity) measurethedegreeofleveragethata
firmhas,butbothwillbeheavily
influencedbyhowdifferentbook
valueisfrommarketvalue.
Ingeneral,sincethemarketvalueof
equityismuchhigherthanbookvalue
ofequityforfirms,whilethemarket
Debt/Equity BookValueofDebt/BookValue valueofdebtiscomparabletobook
ofEquity value,theseratioswilloverstate
leverage.
Finally,theseratioswillbeaffectedby
whatgetsdefinedasdebt.Thus,
operatingleaseswillnotshowupas
debtandaffectleverage.

CashFixed EBITDA/CashFixedCharges Theseratiosmeasurethecapacityofa


ChargesCoverage firmtomeetitscashflowobligations.
Ratio Totheextentthattheratiosarelow,
and/orthereisvariabilityinthe
earnings,afirmsdefaultriskwill
increase.
Notethatthefixedchargesdonot
InterestCoverage EBIT/InterestExpenses includediscretionaryexpensessuchas
Ratio capitalexpenditures,whichmightbe
essentialtothefirmslongterm
survival.

InSummary

Financialstatementsremaintheprimarysourceofinformationformostinvestorsandanalysts.Whilean
understandingofeverydetailandFASBrulemaynotbenecessary,itisimportantthatthebasicsbeunderstood.
Thisprimerattemptstoexplainthebasicsoffinancialstatementsandthegenerallyacceptedaccounting
principlesthatunderlietheirconstruction,andthevariousfinancialratiosthatoftenaccompanyfinancial
analyses.Aslongasthereisarecognitionthatfinancialstatementsandfinancialratiosareameanstoanend,
whichisunderstandingandvaluingthefirm,theyareuseful.

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