FSA: Chapter 1

Assignment #1

1. Explain the claim: financial statement analysis is an integral part of business analysis.
a. It Reduces guess/intuitions of business decisions, provides a systematic and effective
basis of business analysis and reduces uncertainties of business analysis
b. Financial statements are means through which companies present their financial
situation to shareholders, creditors and general public.
c. Financial statement analysis is the use of analytical or financial tools to examine and
compare financial statements in order to make business decisions. In other words,
financial statement analysis is a way for investors and creditors to examine financial
statements and see if the business is healthy enough to invest in or loan to.

2. What are the difference between credit analysis and equity analysis?
a. Credit analysis:
i. Analysis focus on downside risk; will the company be able to pay interest and
principal, ability to honor credit obligations
ii. Liquidity: focus on cash flows and current assets and current liabilities
iii. Solvency: ability to meet long term obligations, focus on long term profitability
and capital structure
b. Equity Analysis:
i. Analysis of downside risk and upside potential
ii. Technical analysis: Patterns in price or volume history of a stock, Predict future
price movements
iii. Fundamental analysis: Determine Intrinsic value without reference to price,
Analyze and interpret key factors; Economy, Industry, Company

3. Explain the term credit worthiness. How can credit worthiness be measures?
a. Credit worthiness: is a valuation performed by lenders that determines the possibility a
borrower may default on his debt obligations
b. Measured by credit ratings performed by independent credit rating firms
c. A credit rating can be assigned to any entity that seeks to borrow money — an
individual, corporation, state or provincial authority, or sovereign government.

4. Briefly explain the differences between liquidity risk and solvency risk.
a. Liquidity risk:  is the risk that a company or bank may be unable to meet short term
financial demands. This usually occurs due to the inability to convert a security or hard
asset to cash without a loss of capital and/or income in the process.
b. Solvency risk: Solvency is the ability of a company to meet its long-term financial
obligations. Solvency is essential to staying in business as it demonstrates a company's
ability to continue operations into the foreseeable future. While a company also needs
liquidity to thrive, liquidity should not be confused with solvency.