Question

Where do analysts get financial information about companies?

Answer 1

ANSWER:Financial information about companies comes mainly from the companies themselves. The primary source is the annual report. Since the annual report is essentially a report on the performance of management written by management, it tends to be favorably biased. The numerical information is usually correct, but the accompanying verbiage can be deceptively positive in tone and implication, especially with respect to prospects for the future. 3.Financial analysts are generally optimists who believe what they're told. Right or wrong? Explain.ANSWER:Wrong. The whole idea behind financial analysis is to be investigative and critical. The analyst is always looking for potential problems that may make the future less attractive than the past. 4.If a company's cash account increases from the beginning to the end of the year, there's more cash on hand so that must be a source of cash. Yet the cash account is an asset and the first cash flow rule says that an asset increase is a use of cash. Explain this apparent conflict.ANSWER:Cash in the bank is an asset that had to be put there. Putting it there uses cash that then can't be used anywhere else until it's withdrawn. In a sense, the firm "buys" a balance in its checking account with cash deposits. Therefore, increasing the cash balance usescash.5.Why don't we calculate the total difference in the equity accounts between the beginning and end of the year and consider that difference as a source or use of cash? Why do we similarly exclude the cash account? ANSWER:Changes in the equity accounts come from three sources, net income, dividends and the sale of new stock. Net income is included in operating activities, while dividends and new stock sales are part of financing activities. Since the items are included in the cash statement format, there is no need to consider changes in equity as a difference. The change in the cash balance is treated as a reconciling item in the cash flow format. Essentially the cash statement "proves" the cash balance.6.What are free cash flows? Who is likely to be most interested in them? Why?ANSWER:Free cash flow is a firm's gross cash flow less necessary reinvestments. It's essentially cash available for distribution as dividends. When one company acquires another, the acquirer is interested in the future free cash flow of the acquiree as an indication of whether the parent firm will have to invest more cash after the acquisition or will be able to take some out for use elsewhere. 7.Outline the thinking behind ratio analysis in brief, general terms (a few lines; don't go into each ratio individually).