Financial Statement Analysis: A Powerful Tool for Businesses

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• Financial statement analysis is a critical process that involves evaluating a company's financial performance, financial position, and cash flow. By analyzing financial statements, businesses can identify trends, strengths, weaknesses, and opportunities for improvement.

 

• Our accounting firm provides financial statement analysis services that can offer significant benefits to our clients. By leveraging our insight, businesses can make informed decisions, enhance their financial performance, and achieve their strategic objectives.

 

• We go the extra mile by applying data analytics to financial statement analysis of your company or organization and we follow-up with Generative AI Business and Organization Solutions to improve efficiency, productivity, cost reduction, revenue expansion, risk mitigation, and profitability for your many department function operations.

 

• Essentials of Financial Statement Analysis

 

• Financial statement analysis involves a systematic evaluation of a company's financial statements to assess its financial health and performance.

 

• Key financial statements include the income statement, balance sheet, and cash flow statement.

 

• Financial ratios are calculated to measure various aspects of a company's financial performance, such as profitability, liquidity, solvency, and efficiency.

 

• Trend analysis compares financial data over time to identify trends and patterns.

 

• Comparative analysis compares a company's financial performance to industry benchmarks or competitors.

 

• Financial Statement Analysis and Accounting Quality

 

• Accounting quality refers to the reliability and relevance of financial information.

 

• High-quality financial statements provide a clear and accurate picture of a company's financial position and performance.

 

• Financial statement analysis can help identify potential accounting irregularities or misstatements.

 

• Our firm can assist in assessing accounting quality and ensuring compliance with accounting standards.

 

• Profitability, Competition, and Business Strategy

 

• Financial ratios are used to assess a company's profitability, including return on assets (ROA), return on equity (ROE), and profit margin.

 

• Profitability analysis can help identify areas for improvement and measure the effectiveness of business strategies.

 

• Return on assets (ROA) measures how efficiently a company is using its assets to generate profits.

 

• Competitive advantage refers to a company's ability to outperform its competitors.

 

• Financial statement analysis can help identify a company's competitive strengths and weaknesses.

 

• Liquidity, Solvency, and Credit Analysis

 

• Short-term liquidity measures a company's ability to meet its short-term obligations.

 

• Long-term solvency measures a company's ability to meet its long-term debt obligations.

 

• Cash flow analysis evaluates a company's cash inflows and outflows.

 

• Financial ratios such as the current ratio, quick ratio, and debt-to-equity ratio are used to assess liquidity and solvency.

 

• Credit analysis is used to assess a company's creditworthiness and risk of default.

 

 

 

 

Revenue Recognition in Financial Statement Analysis

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• Revenue recognition is a critical aspect of financial reporting that directly impacts a company's profitability and valuation. Accurate revenue recognition is essential for providing stakeholders with a clear and reliable picture of a company's financial performance. By leveraging our services, businesses can ensure compliance with accounting standards, enhance their financial reporting, and make informed business decisions.

 

• Five-Step Revenue Recognition Model

 

• Step 1: Identify the contract(s) with a customer: Determine if a contract exists between the company and a customer.

 

• Step 2: Identify the performance obligations in the contract: Identify the distinct goods or services that the company is obligated to transfer to the customer.

 

• Step 3: Determine the transaction price: Determine the total amount of consideration expected to be received from the customer.

 

• Step 4: Allocate the transaction price to the performance obligations in the contract: Allocate the transaction price to each performance obligation based on their relative standalone selling prices.

 

• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation: Recognize revenue as the company transfers control of a performance obligation to the customer.

 

• Practical Expedients in Applying the Model

 

• Simplifying the model for certain contracts

 

• Using the practical expedient for contracts with a single performance obligation

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• Applying the practical expedient for contracts with a single performance obligation that is satisfied over time

 

• Applying the Model to Contract Modifications

 

• Assessing whether a contract modification is a separate contract

 

• Adjusting the transaction price and performance obligations accordingly

 

• Contract Acquisition and Fulfillment Costs

 

• Amortization: Allocate the cost of acquiring or fulfilling a contract over the period in which the related performance obligations are satisfied.

 

• Impairment: Assess whether the carrying amount of a contract asset exceeds its recoverable amount.

 

• Disclosure Notes

 

• Disaggregated revenue: Disclose revenue by major product or service category.

 

• Contract balances: Disclose information about contract assets and contract liabilities.

 

• Performance obligations and significant judgments: Disclose information about the nature of performance obligations and significant judgments made in applying the revenue recognition model.

 

 

 

 

Valuation and Credit Risk Assessment in Financial Statement Analysis

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• Financial statement analysis plays a crucial role in valuation and credit risk assessment. By analyzing a company's financial performance, financial position, and cash flow, investors, lenders, and other stakeholders can assess the company's value and creditworthiness.

 

• Our accounting firm provides financial statement analysis services that can offer significant benefits to our clients, including improved decision-making, enhanced risk management, and increased access to capital.

 

• Business Valuation

 

• Discounted cash flow valuation approach: A method of valuing a business by estimating its future cash flows and discounting them to their present value.

 

• Free cash flow model: A specific discounted cash flow approach that focuses on the cash flow available to the company's equity holders.

 

• The Role of Earnings in Valuation

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• Earnings quality refers to the reliability and relevance of a company's earnings.

 

• Earnings persistence measures the likelihood that a company can maintain its current earnings level.

 

• Earnings growth is a key factor in determining a company's valuation.

 

• The Abnormal Earnings Approach to Valuation

 

• Abnormal earnings are the difference between a company's actual earnings and its expected earnings based on its cost of equity capital.

 

• Return on common equity (ROCE): A measure of a company's profitability relative to its equity capital.

 

• Positive abnormal earnings indicate that a company is generating excess returns, while negative abnormal earnings suggest that it is underperforming.

 

• Fair Value Accounting

 

• Exit price: The price at which a company could sell an asset or liability in an orderly transaction.

 

• Entry price: The price at which a company could acquire an asset or liability in an orderly transaction.

 

• Market prices: The prices at which assets or liabilities are traded in active markets.

 

• Credit Risk Assessment

 

• Short-term loans: Loans with a maturity of less than one year.

 

• Long-term loans: Loans with a maturity of more than one year.

 

• Revolving loans: Loans that can be borrowed and repaid multiple times within a specified period.

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• Credit analysis: The process of evaluating a borrower's creditworthiness to assess the risk of default.

 

• Small Business Credit Ratings and Default Risk: Dun & Bradstreet, Experian, and Equifax

 

• Credit rating process: The process of assigning a credit rating to a company based on its financial strength and creditworthiness.

 

• Dun & Bradstreet: A leading credit reporting agency that provides credit ratings and risk assessments for businesses. By getting a D-U-N-S Number your company can more easily connect with other businesses resulting in considerable growth in sales.

 

• Experian business credit reports and Equifax Commercial: These credit reporting agencies help your business make insightful credit risk decisions about prospective business partners, suppliers, and customers.

 

• Experian: To register your small business with Experian and obtain a Business Identification Number (BIN), follow these steps:

 

1. Check if Your Business is Already Listed

 

• Before registering, check if Experian already has a file on your business. Many small businesses are automatically added when they open bank accounts, apply for business credit, or establish trade lines. You can use Experian’s Business Credit Report service to search for your business.

 

• Go to the Experian Business website.

 

• Enter your business name and address in the search tool to see if Experian has a file for your company.

 

2. Register for an Experian Business Account

 

• If your business isn’t listed, you may need to create a new file:

 

• Visit the Experian Small Business Services page.

 

• Sign up for a business credit account to manage your business credit profile.

 

• Follow the instructions to provide information about your company, such as your business name, address, employer identification number (EIN), and other key details.

 

3. Provide Trade References

 

• To build your credit profile, you can add trade references by reporting your suppliers, lenders, and service providers. This helps Experian gather more information about your business's creditworthiness.

 

4. Obtain Your Business Identification Number (BIN)

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• After registering and providing necessary information, Experian will generate a Business Identification Number (BIN). This number serves as a unique identifier for your business in Experian’s credit database.

 

5. Monitor and Manage Your Credit Report

 

• Once your business has a BIN, you can monitor your Experian Business Credit Report regularly. You’ll be able to track how lenders, vendors, and other entities view your business's creditworthiness.

 

• Equifax Commercial: Here’s a breakdown of how Equifax Commercial works for small businesses and how it compares to Experian:

 

1. Automatic Inclusion (Similar to Experian)

 

• Like Experian, Equifax often creates business credit profiles automatically based on data they collect from various sources such as lenders, suppliers, and public records. Many small businesses may already have a credit profile with Equifax without formally registering.

 

• How to Check if Your Business is Already Listed:

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• Visit the Equifax Small Business website.

 

• Request your Equifax Business Credit Report to see if your business has a credit profile. They may ask for your business name, address, and other details to locate your file.

 

2. Creating or Updating Your Equifax Business Profile

 

• If Equifax doesn’t have a credit profile for your business, you can create one, but the process is slightly different from Experian:

 

• Equifax doesn’t have a direct registration form for business owners to open a business credit profile as Experian does. Instead, Equifax collects business data primarily from credit interactions (e.g., applying for business credit cards, loans, or establishing trade accounts).

 

• Your business’s credit file will generally be created after your first interaction with a lender, supplier, or trade line that reports to Equifax.

 

3. Submitting Information to Equifax (Differences from Experian)

 

• Unlike Experian, which allows businesses to directly provide trade references, Equifax relies on its network of data partners (e.g., lenders, vendors) to gather information. Therefore, you cannot manually submit trade references or financial data directly to Equifax to build your credit profile.

 

4. Business Identification Number (Differences)

 

• Experian BIN: Experian assigns a unique Business Identification Number (BIN) when you create a profile.

 

• Equifax ID: Equifax uses a different system, where your business’s file is associated with your business name and other identifying information rather than issuing a public-facing ID number like the Experian BIN.

 

5. Managing Your Credit Profile

 

• Equifax does offer a Business Credit Monitoring service where you can monitor your business’s credit, similar to Experian:

 

• You can purchase credit monitoring tools to view your Equifax Business Credit Report and track any changes in your credit profile.

 

• Equifax also allows you to dispute errors or inaccuracies in your business credit report through their online platform.

 

• Key Differences Between Experian, Equifax, and Dun & Bradstreet:

 

• Direct Profile Creation:

 

• Experian: Allows you to actively register your business and provide trade references to build your credit profile.

 

• Equifax: Relies primarily on lenders, vendors, and credit interactions to automatically create and update your profile. It does not offer a direct registration process for business owners.

 

• Dun & Bradstreet (D&B): Actively encourages businesses to register for a D-U-N-S Number, which is essential for establishing a business credit profile. D&B also allows you to submit trade references to help build your profile.

 

• Identification Numbers:

 

• Experian: Issues a unique Business Identification Number (BIN) for your business once it’s registered.

 

• Equifax: Associates your profile with your business name and key information but does not issue a public-facing ID like Experian or D&B.

 

• Dun & Bradstreet: Uses a D-U-N-S Number, which is a globally recognized identifier that businesses use for credit reporting and other purposes.

 

• Trade References:

 

• Experian: Allows you to submit trade references directly, helping you to actively build your credit profile.

 

• Equifax: Does not allow businesses to submit trade references. Your profile grows based on data from vendors, lenders, and other third parties.

 

• Dun & Bradstreet: Encourages businesses to submit trade references, which are factored into your Paydex Score and overall credit profile.

 

 

• Summary: Experian, Equifax, and Dun & Bradstreet

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• While Experian, Equifax, and Dun & Bradstreet all collect business credit data from third parties, there are key differences in how businesses can engage with these agencies. Experian and Dun & Bradstreet allow you to directly register and submit trade references to help build your credit profile. In contrast, Equifax relies on lenders and vendors to automatically create and update your profile without a formal registration process. Dun & Bradstreet further distinguishes itself with the D-U-N-S Number, a widely used business identifier.

 

• Financial ratios and debt ratings: Financial ratios and debt ratings are key factors considered in credit risk assessments.

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