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Financial Accounting in an Economic Context, 9th Edition by Jamie Pratt

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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 ...

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