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This is the ultimate guide for anyone looking to really understand how to conduct financial statement analysis for credit analysis purposes.

Covers everything in easy-to-understand PLAIN English.

Section I - Introduction 4

Section II - THE AUDITOR'S OPINION 6

Section III - THE BALANCE SHEET 6
The Balance Sheet in Greater Detail 7
The Balance Sheet Formula 8
Leases 9
Non-current Assets 9
Characteristics of Intangible Assets 10
Liabilities 10
Equity 11
Exhibit II-A -- Balance Sheet 12
Paid-in capital 12
Additional paid-in capital 13
Preferred stock 13
Retained earnings 13
Treasury stock 14
Risk Management and Uncertainty 14
Exhibit II-B - Risk Management and Uncertainty 15
Limitations of Balance Sheet Analysis 15
Elements of a Detailed Balance Sheet 17

Section IV - THE INCOME STATEMENT 17
Exhibit III-A - Income Statement 18
Income Statement Basics 18
Addressing Operating Losses - Excerpt from an Income Statement 20

Section V - THE CASH-FLOW STATEMENT 22
Exhibit IV-A - A Typical Statement of Cash Flows 26
Exhibit IV-B - Statement of Cash Flows With Negative Cash Flow 28
Notes to the Financial Statements 29
Accounting Rules 29
Accounting Concepts 31
How to Obtain Financial Statements 33
Financial Statement Manipulation by Publicly Traded Companies 34
Commercial Credit Reporting Agencies 34
The Value of Audited Financial Statements 35
Financial Statement Reliability 36
How to Get Financial Statements From Privately Held Companies 41
Internal Versus Comparative Analysis 42
Financial Ratio Analysis 42

Section VI - TYPES OF RATIOS 43
Liquidity Ratios 43
The Current Ratio 43
The Quick Ratio 44
Indications of a Liquidity in the Problem XY Company 45
Leverage Ratios 46
Total Liabilities to Net Worth 46
The Debt to Asset Ratio 47
Current Liabilities to Net Worth 47
The Interest Coverage Ratio 47
The Long-Term Debt to Equity Ratio 47
Efficiency Ratios 47
The Average Collection Period 47
The Accounts Receivable Turnover Ratio 48
The Inventory Turnover Ratio 48
The Asset Turnover Ratio 48
Sales to Net Working Capital 49
The Accounts Payable to Sales Ratio 49
Profitability Ratios 49
The Use and Abuse of Ratio Analysis 51

Section VII - ANALYSIS ISSUES 53
Fiscal Versus Calendar Year-End Accounting 53
Consolidated Financial Statements 53
Pro Forma Financial Statements 54
Steps in Evaluating Financial Statements 55
Performing a Quick Review of Financial Statements 56
Elements of a Comprehensive Financial Analysis 57
Limitations of Financial Statement Analysis--What Credit Managers Need to Know 58
What Credit Professionals Should Know About Financial Reports Submitted Under SEC Regulations: 60
Financial Fraud Detection 60
A Guide to Nonfinancial Credit Risk Analysis 61

Section VIII - FREQUENTLY ASKED QUESTIONS ABOUT FINANCIAL STATEMENTS 62
Glossary of Terms 66
Securities and Exchange Commission Filings 77
S-1 77
8-K 77
10-K 77
10-Q 77
10-QSB 77
12b-25 77
How to Read an Annual Report 78

Section IX - ANALYZING FINANCIAL STATEMENTS IN SPECIAL SITUATIONS 9
EXHIBIT VIII-A - Credit Granting Involving a Company in the Developmental Stage - Balance Sheets 79
EXHIBIT VIII-B - Credit Decisions Under Uncertainty 81
How to address the question of whether of not to extend credit to a customer that reports a net loss but has a general healthy balance sheet 81
EXHIBIT VIII-C Concerns About Liquidity: Excerpts From a Balance Sheet 86
EXHIBIT VIII-D - How to Evaluate Credit Risk When a Customer Reports a Large Deficit Net Worth 88
EXHIBIT VIII-E - Considering Sales to an Account With a Weak Current Position 89