ACCT-UB 3 - Financial Statement Analysis

Module 1 Homework

You will have a single opportunity to submit a single file (please submit a word or excel formatted file) with your
answers. Re-submissions will not be permitted. Feel free to type in your answers after each question below and submit
this same file. Before submitting your file make sure it is titled: [your last name] Mod X HW (substitute the “X” for the
appropriate module number).

If you complete the homework in a group (maximum 4 students per group), each student must submit the same file and
at the top of the file you should specify that it is a group solution, giving the names of all students in the group.

Please provide all answers to the following questions:

1.- Name 5 key groups that utilize a corporation’s financial statements and explain what each group would utilize the
statements for.

1) The five key groups that utilize a corporation’s financial statements are: -
a) Investors and Creditors - to assess company prospects for investing and lending decisions
b) Board of directors - to monitor managers’ decisions and actions as investor representatives
c) Employees and unions – for the purposes of labor negotiations
d) Suppliers – to set credit terms
e) Investment advisors and information intermediaries – to make buy-sell recommendations and in
credit rating. Investment bankers use financial statements to determine company value in the case of an
IPO, merger or acquisition.

2.- Explain the meaning of “intrinsic value.”

2) Intrinsic value is the value of a company (or its stock) determined through fundamental analysis
without reference to its market value (stock price). Intrinsic value is determined by forecasting a
company’s earnings or cash flows, and determining its risk.

3.- Explain the meaning of “liquidity” and “solvency”

3) Liquidity is the company’s ability to raise cash in the short term to meet its obligations. It is dependent
on the company’s cash flows and the makeup of its current assets and liabilities.
Solvency is a company’s long- run viability and ability to pay long term obligations. It is dependent on
both a company’s long-term profitability as well as its capital structure. it is used as a measure of a
company’s long-run financial health.

4.- In your own words, explain the meaning of Financing, investing and operating activities.

4) Financing Activities are activities undertaken by a company in order to raise money to fund either
company activities or expansion/acquisitions. These activities involve debt, equity and dividends.
Operating Activities are the functions of a business directly related to providing its goods and/or

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services to the market. These are the company’s core business activities such as manufacturing,
distributing, marketing and selling a product or service.
Investing Activities refer to a company’s acquisition and maintenance of investments for the purposes
of selling products/services and for the purposes of investing excess cash. Investing in operating assets
(buildings, land, inventories) and financial assets (securities) are examples of operating activities.