ELEMENTS OF FINANCIAL STATEMENT ANALYSIS
Given that the use of financial statements for predicting future earnings and cash flows is limited due to the lack of forward-looking information, unrecorded events, and management bias, it is important that financial statement analysis address the following issues:
- Assessing the business environment.
- Reading and studying the financial statements and footnotes.
- Assessing earnings quality.
- Analyzing the financial statements.
- Predicting future earnings and/or cash flows.
In this chapter these issues are discussed in a given order, but keep in mind that different analysts use different methods. Indeed, financial statement analysis is an art, not a science, where judgment plays an extremely important role.
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