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Estimated study time: 55 minutes
Content:
Financial statement analysis goes beyond GAAP measurement to interpret economic performance. Ratio analysis categories: Liquidity (current ratio = current assets / current liabilities; quick ratio = (cash + ST investments + net receivables) / current liabilities; operating cash flow ratio = CFO / current liabilities); Solvency (debt-to-equity, debt-to-assets, times-interest-earned = EBIT / interest expense); Profitability (gross margin, operating margin, net margin, return on assets = net income / avg total assets, return on equity = net income / avg shareholders' equity); Activity/Efficiency (asset turnover = revenue / avg assets; inventory turnover = COGS / avg inventory; receivable turnover = revenue / avg net receivables; days metrics = 365 / turnover).
DuPont analysis decomposes ROE into three drivers: Net profit margin × Asset turnover × Financial leverage (equity multiplier). This framework identifies whether ROE improvement comes from better profitability, better asset use, or higher leverage — which have very different risk profiles.
Forecasting and budgeting: Top-down forecasting (macroeconomic assumptions → industry → firm); bottom-up forecasting (unit-level assumptions rolled up). Variance analysis: Actual vs. budget. Sales volume variance = (actual units − budgeted units) × budgeted price. Price variance = (actual price − budgeted price) × actual units. Flexible budget removes volume differences to isolate efficiency: flexible budget variance = actual cost − (actual units × standard cost per unit).
Cost behavior: Variable costs change proportionally with activity; fixed costs remain constant; mixed (semi-variable) costs have both components. Contribution margin = revenue − variable costs. Break-even point (units) = fixed costs / contribution margin per unit. Break-even (dollars) = fixed costs / contribution margin ratio. Margin of safety = actual sales − break-even sales.
Business valuation approaches: Income approach (discounted cash flow — project free cash flows, discount at WACC; capitalization of earnings); Market approach (comparable company multiples — EV/EBITDA, P/E, P/S; comparable transactions); Asset approach (book value, liquidation value). WACC = (E/V) × Ke + (D/V) × Kd × (1 − tax rate). Cost of equity (CAPM): Ke = Rf + β × (Rm − Rf).
Data analytics in business analysis: Descriptive analytics (what happened — dashboards, reports); diagnostic analytics (why it happened — drill-down, data mining); predictive analytics (what will happen — regression, ML models); prescriptive analytics (what should we do — optimization). CPAs must understand data quality issues: completeness, accuracy, consistency, timeliness.
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