[pic]CHAPTER 12

12-1 Decision makers use financial statement analysis to extract relevant information from financial statements in order to assess a company's financial position and prospects.

12-2 In addition to the basic financial statements, annual reports generally contain footnotes to the statements, a summary of accounting policies, management's discussion and analysis of the financial results, the auditor's report, comparative financial data for a series of years, and narrative data about the company, its operations, and its prospects.

12-3 Sources of information include reports to the SEC, press releases and articles in the business press, company Web sites, trade and industry publications, analysts’ reports, investors' services and newsletters.

12-4 No. Past results often aid the prediction of future returns and their risks.

12-5 Equity investors are most concerned with information about profitability and future security prices. In contrast, creditors mainly want to know about short-term liquidity and long-term solvency.

12-6 Yes, to a certain extent. When revenues increase faster than net income, it means that costs are increasing faster than revenues. However, it is important not to jump to conclusions without asking “why?”. There may be a good explanation for the cost increases. So it warrants attention, but one should not automatically conclude that something is wrong. 12-7 Business practices often change and, therefore, expected financial relationships might change. Booms and recessions occur. But these are not the appropriate explanations for all observed changes. The more critical concerns would be changes in accounting method, and IBM experienced several, including a change in depreciation method and early, voluntary changes in accounting for non-pension retiree costs. Significant acquisitions and divestures also