Monday, February 7, 2011

Think you know Financial Statements?

I'm currently studying for my Financial Statements Analysis class and I'm having more trouble than I thought I would one particular type of question. It has to do with Common Size Analysis, where both the balance sheet and income statement of a company are common sized with respect to revenue. The prof puts a whole bunch of different companies from different industries in a spreadsheet, and you need to figure out which firm matches which common size column in the sheet. Some are easy, but differentiating a tobacco company from a brewery really tests your understanding of how exactly each type of business works.

I've designed an easy version for you to try. It has (in no particular order) a grocery firm, a bank, an auto company, a pharmaceutical company, a oil company, and a telecommunications company. Try it. (Blank means N/A)


I'll put the results at the end of this post in backwards typing. First some tips I've learned from class:
  • Look for outliers. Think about why a firms line item might be 0 or very large.
  • Group 'like companies', find them on the table and then pull out all the differences and think about which might belong to whom. This is especially important when the table has several companies from the same industry, the above table is much more straight forward. 
  • When in doubt to your ratios, D/E, Days A/R A/P and Inventory, ROE decomposition.
  • Think about GAAP. Who gets to record R&D, who uses the other assets accounts.
And the results. In backwards type to keep you from getting it at a glance
Firm 1 - knab: knab fo avon aitocs
Firm 2 -sag dna lio: rocnus
Firm 3 - moclelt: tta
Firm 4 - yrecorg: regork
Firm 5 - amrahp: kcrem
Firm 6 -otua: drof

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