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Financial Statement Analysis Goal of Financial Statement Analysis 1. Perspective of the user Allow the user to accurately measure the profitability and financial condition of the company 2. Perspective of the issuer --The corporation exists for the benefit of the user --Its objective is not to educate the public about its financial condition --Its objective is to maximize shareholder's wealth. Po = CF K Share price is maximized by either increasing cash flow or by reducing the cost of capital or both. If the financial statement conveys the impression of low risk, the cost of capital should be reduced. --Maximize share price --Obtain highest rating possible because this will reduce the cost of capital --If inaccurate statements achieve these goals, then it is likely that the statements will be inaccurate. Why are statements Inaccurate? --Don't conform to GAAP standards?? * Numbers can be pushed significantly and still conform to GAAP * Unreasonable assumption about growth, investment rates, default rates, cost etc. --Violations of accounting rules --Outright Fraud Some ways...

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