Questions

QUESTIONS
1 Business analysis is the evaluation of a company’s prospects and risks for business
decisions. Applicable business decisions include, among others, equity and debt
valuation, credit risk assessment, earnings prediction, audit testing, and countless
other decisions. The objective of business analysis is to aid with decision making by
helping to structure the decision task, including an evaluation of a company’s business
environment, its strategies, and its financial position and performance. As a result, the
decision-maker will make a more informed decision.
4 Credit analysis supports the lending and borrowing decision. As such, credit analysis
involves determining whether a company will be able to meet financial obligations over a
given time horizon. Equity analysis supports the decision to buy, hold, or sell a stock.
As such, equity analysis involves the identification of the optimal portfolio of stocks for
wealth maximization.
5 Fundamental analysis is the process of determining the value of a company by

analyzing and interpreting key factors for economy, industry, and company attributes.
A major part of fundamental analysis is evaluation of a company’s financial position
and performance. The objective of fundamental analysis is to determine the intrinsic
value of an entity. Determination of fundamental value can be used to support stock
decisions and to price acquisitions.
6 Total business analysis involves several component processes. Each process is critical
to the ultimate summary beliefs about the business.
The first component is analysis of the business environment and the company’s
strategy in the context of the business environment. From this analysis, qualitative
conclusions can be drawn about the future prospects of the firm. These prospects are
crucial in investment decisions.
The second component of business analysis is financial analysis. Financial analysis
is the use of financial statements to analyze a company’s financial position and
performance, and to assess future performance. Financial analysis supports equity
decisions by providing quantified evidence regarding the financial position and
performance of the company. Accounting analysis is another component of business
analysis. Accounting analysis is the process of evaluating the extent that a company’s
accounting reflects economic reality. If the accounting information distorts the
economic picture of the firm, decisions made using this information can be flawed. Thus,
accounting analysis should be performed before financial analysis. Prospective
analysis is the forecasting of future payoffs. This analysis draws on accounting
analysis, financial analysis, and business environment and strategy analysis. The
output of prospective analysis is a set of expected future payoffs used to estimate intrinsic
value such as earnings and cash flows. Another component of business analysis is
valuation, which is the process of converting forecasts of future payoffs into an estimate of
a company’s intrinsic value.
9 Internal users: Owners, managers, employees, directors, internal auditors;
External users: Current and potential equity investors, current and potential debt investors,
current and potential creditors, current and potential suppliers, current and potential
customers, labor unions members and representatives, regulators, and government
agencies.
11 Business activities—planning, financing, investing, and operating—can be synthesized into

a cohesive picture of how businesses function in a market economy. Step one is the
company's formulation of plans and strategies. Next, a company obtains necessary
financing from equity investors and creditors. Financing is used to acquire investments in
resources to produce goods or services. The company uses these investments to
undertake operating activities.
At the end of a period of time—typically quarterly or annually—financial statements are

prepared and reported. These statements list the amounts associated with financing and
investing activities, and summarize operating activities for the most recent period(s). This is
the role of financial statements—the object of analysis. The financial statements listing of
financing and investing activities is at a point in time, whereas the reporting of
operating activities cover a period of time.
15 Financial analysis includes analysis of the profitability of a company, the risk of the
company, and the sources and uses of funds for the company. 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 drivers of
profitability. Profitability analysis includes evaluation of two sources of profitability:
margins and turnover. Risk analysis is the evaluation of a company’s riskiness and its
ability to meet its commitments. Risk analysis involves assessing the solvency and
liquidity of a company along with its earnings variability. An analysis of sources and
uses of funds is the evaluation of how a company is obtaining and deploying funds. This
analysis provides insights into a company’s future financing implications.
18 Past trend often is a good predictor of the future if all relevant variables remain constant
or nearly constant. In practice, however, this is seldom the case. Consequently, the
analyst should use the results of trend analysis and adjust them in the light of other
available information, including the expected state of the economy and industry. Trend
analysis will, in most cases, reveal the direction of change in operating performance
along with the magnitude of change.

Questions

Uploaded by

Copyright:

Available Formats

Questions

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Questions

Uploaded by

Copyright:

Available Formats

QUESTIONS

5 Fundamental analysis is the process of determining the value of a company by

11 Business activities—planning, financing, investing, and operating—can be synthesized into

At the end of a period of time—typically quarterly or annually—financial statements are

You might also like