Financial Accounting: In an Economic Context

CHAPTER 5

Using Financial Statement Information

KEY POINTS

The following key points are emphasized in this chapter:

• Using financial accounting numbers to influence management decisions and predict future events.
• Five steps of financial statement analysis.
• Assessing the business environment.
• Assessing earnings quality and persistence.
• Analyzing financial statements.
• Difficulties involved in using annual report information to identify mispriced securities.
• Difficulties involved in using financial statements to compare the performance of companies operating in different countries.

When a company reports its results, it had better beat the expectations of the analysts who follow that company, or look out, stock price! Network equipment maker Juniper Networks, Inc. (JNPR) represents a prime example. You would think that when JNPR reported an 8 percent jump in 2009 quarterly revenue and a 14 percent increase in profits, the stock price would soar. Not true. JNPR stock was actually off 13 percent, down to $14.77 per share. Why? It seems that reported earnings per share and revenue, even though lofty, didn't quite make the consensus analyst earnings prediction as compiled by Thomson First Call.

Earnings predictions are prepared regularly by analysts who closely follow companies, and they are compiled by groups like Thomson First Call and Nelsons. Stock prices react to those predictions, and when they are not met, stock prices drop. To achieve or beat these expectations, companies often ...