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! Diversified manufacturer Minnesota Mining & Manufacturing, better known as 3M, reported first quarter 2013 results in late April. Despite a difficult economic climate, the company reported that revenue was up to $7.63 billion, compared to $7.49 billion for the first quarter of 2012, and that earnings, on a per common stock share basis, were up to $1.61 compared to $1.59 for the same period the previous year. However, the stock market analysts following the company, polled by Thomson First Call, were expecting earnings of $1.65 per share from revenue of $7.81 billion. The company's stock price fell from $107.58 to $103.83 over the next four trading days.

Earnings predictions are prepared regularly by analysts who closely follow companies and they are compiled by groups ...

Get Financial Accounting in an Economic Context, 9th Edition now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.