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Financial Statement AnalysisModule 3 of 9

Analyzing Balance Sheets

5

Concepts

4

Formulas

1

Decisions

3

Quiz Questions

Key Concepts

5 concepts covered in this module.

Intangible Assets

Identifiable (patents, trademarks) can be recognized. Goodwill arises only from acquisitions. Internally generated goodwill NOT recognized.

Goodwill

Purchase price - Fair value of net identifiable assets. Not amortized but tested annually for impairment. Only written DOWN (GAAP); IFRS similar.

Financial Instruments

Amortized cost, Fair value through OCI (FVOCI), Fair value through P&L (FVPL). Classification affects income volatility.

Deferred Tax Liabilities/Assets

DTL: taxable temporary differences (tax owed later). DTA: deductible temporary differences (tax benefit later).

Common-Size Balance Sheet

Express each item as % of total assets. Shows capital structure and asset composition.

Formulas

4 essential formulas for this module.

Goodwill

Goodwill = Purchase Price - FV of Net Identifiable Assets

Where: Only from business combinations

Current Ratio

Current Ratio = Current Assets / Current Liabilities

Where: >1 indicates short-term solvency

Debt-to-Equity

D/E = Total Debt / Total Equity

Where: Higher = more leveraged

Debt-to-Assets

D/A = Total Debt / Total Assets

Where: Proportion of assets financed by debt

Decision Frameworks

1 decision frameworks to guide your analysis.

FVPL vs FVOCI vs Amortized Cost?

  • FVPL: trading securities, most volatile income
  • FVOCI: available for sale, unrealized G/L in OCI (not income)
  • Amortized cost: held-to-maturity debt, most stable income

Mind Map

Visual overview of how concepts connect in this module.

Balance Sheet Analysis
Intangibles & Goodwill
Identifiable: recognized
Goodwill: acquisition only
Annual impairment test
No amortization
Financial Instruments
FVPL: G/L in income
FVOCI: G/L in OCI
Amortized cost: stable
IFRS 9 classification
Deferred Tax
DTL: future tax owed
DTA: future tax benefit
Temporary differences
Valuation allowance
Ratios
Current ratio
Quick ratio
D/E
D/A
Common-size
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Intangible Assets

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Answer
Identifiable (patents, trademarks) can be recognized. Goodwill arises only from acquisitions. Internally generated goodwill NOT recognized.
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