Intermediate Financial Accounting II
Disclosure Analysis - Anheuser-Busch
Financial statement analysis is an appraisal of a company’s previous financial performance and its future potential. The CPA is often involved in analyzing the financial statements of an existing client, prospective client, or targeted company for a potential acquisition. Financial statement analysis and disclosure notes aid the CPA in determining what areas to audit and in appraising the overall health of the business. After the CPA completes his or her financial statement analysis, he or she should consult with management to discuss their plans and prospects, identify problem areas, and offer possible solutions.
In analyzing the balance sheet, the CPA is primarily concerned with the realizability of the assets, turnover, and earning potential. The appraisal of the quality of assets is very important. If assets are overstated, net income will be overstated since the earnings do not include necessary charges to reduce earnings to their proper valuations. Assets quality depends on the amount and timing of the realization of assets. Therefore, assets should be categorized by risk category.
• Useful ratios are the percentage of high-risk assets to total assets and high-risk assets to sales. High asset realization risk points to poor quality of earnings due to possible future write-offs.
• Multi-purpose assets are of better quality than single-purpose ones resulting from readier salability.
• Assets lacking separable value cannot be sold easily and as such have low realizability.
A high ratio of sales to cash may indicate inadequate cash. This may lead to financial problems if additional financing is not available at reasonable interest rates. A low turnover ratio indicates excessive cash being held. In this case, the CPA should determine if part of the cash is restricted and unavailable for use.
Realization risk in receivables can be appraised by studying the nature of the...