Sunflower Intelligence
Finance & Accounting

F03 · Intermediate

Financial Statement Analysis

10 lessons

F03 · Intermediate · 10 lessons in four modules · about 12 hours

Financial Statement Analysis

Read a company through its statements: trends, common-size statements, ratios, DuPont analysis and distress scores.

What you will learn

  • Compare two years of statements by horizontal and vertical analysis, with growth rates, common-size statements and margins, and adjust for periods of different length and changes in the business.
  • Measure liquidity, solvency and efficiency with the standard ratios, choose and state the conventions behind each (averages, credit sales, leases as debt), and explain what each one can and cannot show.
  • Calculate return on assets and return on equity and break return on equity into its drivers with the three- and five-step DuPont analysis.
  • Judge the quality of earnings from the cash-flow statement and the notes: cash from operations against net income, accruals, free cash flow and the red flags of aggressive accounting.
  • Calculate Altman’s Z-scores, place a business in its zone, and explain the limits of the model for small, private and lease-heavy businesses.
  • Benchmark a business against peers and published filings, read the MD&A and the notes of an annual report, and write an analysis that reaches a conclusion a lender or owner can act on.

Prerequisites

How it works

Each lesson teaches the idea from first principles, works examples step by step, lets you explore it in an interactive, then has you practise with feedback. A lesson is complete when you have worked its guided problems and scored 80% on its knowledge check. Mastery is tracked separately and comes back for review before you are likely to forget. Each module ends with a test; the course ends with a project and a final assessment.

Fictional case

Lantern Coffee Co. A fictional coffee business founded by Ana Lim. It starts as a catering and barista-training service, opens its own cafés and an online shop for beans, and plans a canned cold brew. Every name and figure in it is invented for teaching.

Not sure where to start?

The diagnostic has 12 questions across the course. It doesn’t count toward anything; it suggests the module to start from. Take the diagnostic.

Modules and lessons

Module 1 Comparing statements

  1. Horizontal analysisPut two or more years of statements side by side, measure what changed in dollars, percentages, index numbers and compound growth rates, and decide which changes are real, which are produced by the calendar or by a new kind of business, and which matter.75 min · not started
  2. Common-size statementsExpress every line of the income statement as a share of revenue and every line of the balance sheet as a share of total assets, read the margins that result, and compare a small business with one thousands of times its size without being misled by how each one classifies its costs.75 min · not started
  3. Module 1 test12 questions on this module. 70% passes.not taken

Module 2 Liquidity, solvency and efficiency

  1. LiquidityMeasure whether a business can pay what falls due in the next year: working capital and the current, quick, cash and operating cash flow ratios, what belongs in each and why, and how to explain a fall like Lantern’s from 2.15 to 0.52.70 min · not started
  2. Solvency and leverageMeasure how far a business is financed by borrowing and how easily it carries the cost: debt and leverage ratios, interest and EBITDA coverage, net debt to EBITDA, leases and vendor finance as debt, and what to do when equity turns negative.75 min · not started
  3. Efficiency and working capitalMeasure how hard a business makes its assets work and how long its cash is tied up: asset turnover, receivables, inventory and payables days, the operating and cash conversion cycles, the contract asset as revenue waiting to be billed, and why growth eats cash.70 min · not started
  4. Module 2 test11 questions on this module. 70% passes.not taken

Module 3 Returns

  1. Return on assets and equityMeasure how much profit a business earns on the resources it uses and on the owners’ capital, on averages stated openly, and judge when a high return on equity reflects good business and when it reflects borrowing, an unpaid owner or tiny equity.75 min · not started
  2. DuPont analysisSplit return on equity into margin, asset turnover and leverage, in three steps and in five, so that you can say why returns moved, compare businesses built in different ways, and see what the decomposition hides.80 min · not started
  3. Module 3 test11 questions on this module. 70% passes.not taken

Module 4 Judging financial health

  1. Cash flow and earnings qualityTest how much of a profit has arrived as cash: compare cash from operations with net income, measure accruals and free cash flow, find the estimates inside earnings, and recognise the warning signs of aggressive accounting.75 min · not started
  2. Distress scoresCombine liquidity, accumulated profit, earning power and leverage into one score with Altman’s Z-score models, place a business in its zone, and judge when the score can and cannot be trusted.70 min · not started
  3. Benchmarking and annual reportsJudge a company’s ratios against the right peers, read an annual report for what the ratios can’t show (the MD&A, the auditor’s report and the notes on revenue, leases and debt), and write an analysis that ends in a conclusion someone can act on.65 min · not started
  4. Module 4 test11 questions on this module. 70% passes.not taken

Project and final assessment

  1. Project: A credit review of Brightwater Bike RepairAnalyse the two years of statements you prepared in F02 for Harbour Credit Union: trends, ratios, DuPont, cash flow and a distress score, benchmarked against similar shops, and recommend whether to lend and on what terms.not taken
  2. Final assessment24 questions across the whole course. 70% passes.not taken

The course is complete when every lesson is complete, every module test is passed, the project is finished and the final assessment is passed.

Resources

  • Glossary: every term this course defines.
  • Formulas: every formula with its symbols and units.
  • Review: flashcards and the questions you missed, when they are due.

Elsewhere on this site

Sources used in this course

  1. Franklin, M., Graybeal, P. & Cooper, D. (2019). Principles of Accounting, Volume 1: Financial Accounting, Appendix A, “Financial Statement Analysis” (horizontal analysis, base year, dollar and percentage change). OpenStax. openstax.org/books/principles-financial-accounting/pages/a-f…
  2. U.S. Securities and Exchange Commission. Beginners’ Guide to Financial Statements (Office of Investor Education and Advocacy; MD&A, the notes and basic ratios). sec.gov/about/reports-publications/beginners-guide-financial…
  3. Starbucks Corporation (2024). Form 10-K for the fiscal year ended 29 September 2024: Consolidated Statements of Earnings, fiscal 2024, 2023 and 2022 (SEC EDGAR, XBRL rendering). sec.gov/Archives/edgar/data/829224/000082922424000057/R3.htm
  4. Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 5.7, “Common-Size Statements”. OpenStax. openstax.org/books/principles-finance/pages/5-7-common-size-…
  5. IFRS Foundation (2016). IFRS 16 Leases: Effects Analysis, January 2016: section 4.1, p. 27 (EBITDA applying IFRS 16 excludes all expenses related to leases); Executive Summary, p. 5 (under the FASB model, expenses related to former operating leases are reported typically on a straight-line basis within operating costs); pp. 19 and 38 (short-term and low-value leases expensed). ifrs.org/-/media/project/leases/ifrs/published-documents/ifr…
  6. Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 6.3, “Liquidity Ratios”. OpenStax. openstax.org/books/principles-finance/pages/6-3-liquidity-ra…
  7. U.S. Securities and Exchange Commission (2007). Beginners’ Guide to Financial Statements. sec.gov/reportspubs/investor-publications/investorpubsbegfin…
  8. Deloitte. Roadmap: Leases, section 14.2, “Lessee” (presentation: ASC 842-20-45-1, 45-4 and 45-5). DART. dart.deloitte.com/USDART/home/codification/broad-transaction…
  9. IFRS Foundation. IFRS 16 Leases (standard summary page). ifrs.org/issued-standards/list-of-standards/ifrs-16-leases
  10. Deloitte. Roadmap: Leases, section 1.2, “Overview” (ASU 2016-02, ASC 842, effective dates). DART. dart.deloitte.com/USDART/home/codification/broad-transaction…
  11. Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 6.4, “Solvency Ratios”. OpenStax. openstax.org/books/principles-finance/pages/6-4-solvency-rat…
  12. Deloitte. Roadmap: Leases, section 8.1, “Overview” (lessee accounting). DART. dart.deloitte.com/USDART/home/codification/broad-transaction…
  13. Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 6.2, “Operating Efficiency Ratios”. OpenStax. openstax.org/books/principles-finance/pages/6-2-operating-ef…
  14. Amazon.com, Inc. (2015). Form 10-K for 2014: consolidated balance sheets (SEC EDGAR financial report R7). sec.gov/Archives/edgar/data/1018724/000101872415000006/R7.ht…
  15. Amazon.com, Inc. (2015). Form 10-K for 2014: consolidated statements of operations (SEC EDGAR financial report R3). sec.gov/Archives/edgar/data/1018724/000101872415000006/R3.ht…
  16. Amazon.com, Inc. (2014). Form 10-K for 2013: consolidated balance sheets, with 31 December 2012 (SEC EDGAR financial report R7). sec.gov/Archives/edgar/data/1018724/000101872414000006/R7.ht…
  17. Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 6.6, “Profitability Ratios and the DuPont Method” (return on total assets and return on equity on average balances). OpenStax. openstax.org/books/principles-finance/pages/6-6-profitabilit…
  18. Damodaran, A. (2007). Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications. NYU Stern School of Business, July 2007 (beginning-of-year denominators, negative book equity, operating leases). pages.stern.nyu.edu/~adamodar/pdfiles/papers/returnmeasures.…
  19. Amazon.com, Inc. (2015). Form 10-K for the fiscal year ended 31 December 2014: Item 6, Selected Consolidated Financial Data (free cash flow and its definition), and the consolidated statements, including the statements of cash flows (R2). SEC EDGAR. sec.gov/Archives/edgar/data/0001018724/000101872415000006/am…
  20. Enron Corp. (2001). Form 8-K, 8 November 2001, Exhibit 99.1: “Enron Provides Additional Information About Related Party and Off-Balance Sheet Transactions; Company to Restate Earnings for 1997–2001”. SEC EDGAR. sec.gov/Archives/edgar/data/0001024401/000095012901503835/h9…
  21. Powers, W. C., Troubh, R. S. & Winokur, H. S. (2002). Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp., 1 February 2002 (filed with Enron’s Form 8-K). SEC EDGAR. sec.gov/Archives/edgar/data/0001024401/000090951802000089/bi…
  22. Enron Corp. (2001). Form 8-K, 8 November 2001, Item 5 and Table 1 (net income, debt and equity as reported and restated). SEC EDGAR. sec.gov/Archives/edgar/data/0001024401/000095012901503835/h9…
  23. Enron Corp. (2001). Form 10-K for 2000, Item 6, Selected Financial Data. SEC EDGAR. sec.gov/Archives/edgar/data/1024401/000102440101500010/ene10…
  24. Amazon.com, Inc. (2024). Exhibit 99.2, “Reconciliation of Non-GAAP Financial Measures” (free cash flow defined with purchases of property and equipment net of proceeds from sales and incentives). SEC EDGAR. sec.gov/Archives/edgar/data/1018724/000110465924045915/tm246…
  25. Boissou, V. & Ahuja, K. (2026). “IFRS 18 changes the statement of cash flows”. KPMG, 1 June 2026. kpmg.com/us/en/articles/2026/ifrs-18-changes-statement-cash-…
  26. KPMG Australia (2019). “AASB 16 Check: How to classify lease payments on lessees’ cash flow statements”, 31 May 2019 (AASB 16 is the Australian equivalent of IFRS 16). kpmg.com/au/en/insights/financial-reporting/leases/aasb-16-c…
  27. Altman, E. I. (1968). “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy”. Journal of Finance, 23(4), 589–609 (issue page, American Finance Association). afajof.org/issue/volume-23-issue-4
  28. Altman, E. I. (2000). “Predicting Financial Distress of Companies: Revisiting the Z-Score and ZETA® Models”. Working paper, NYU Stern School of Business, July 2000 (university course mirror). moodle2.units.it/pluginfile.php/322514/mod_resource/content/…
  29. Altman, E. I. (2017). “The Evolution & Applications of the Altman Z-Score Family of Models & Global Credit Markets Commentary”. Presentation, Global Finance Conference, Hofstra University, 5 May 2017 (slides 11, 25, 27 and 28). hofstra.edu/pdf/community/bdc/breslin/breslin-evolution-of-a…
  30. Altman, E. I. (2019). “50 Years of Altman Z-Score: What Have We Learned & the Applications in Financial & Managerial Markets”. Presentation, LSE Credit Seminar, 16 October 2019 (slide 10). systemicrisk.ac.uk/sites/default/files/images/Evolution%20of…
  31. Starbucks Corporation (2024). Form 10-K for fiscal 2024: Consolidated Statements of Earnings (R3: operating income, interest expense) and Consolidated Statements of Cash Flows (R5: operating cash, dividends, repurchases). SEC EDGAR. sec.gov/Archives/edgar/data/829224/000082922424000057/R5.htm
  32. Deloitte (2020). “FASB Issues ASU Providing Limited Effective-Date Delays for Guidance on Revenue and Leases”, 3 June 2020. DART. dart.deloitte.com/USDART/home/publications/archive/deloitte-…
  33. US Securities and Exchange Commission, Office of Investor Education and Advocacy (2011). Investor Bulletin: How to Read a 10-K. sec.gov/files/reada10k.pdf
  34. US Securities and Exchange Commission (2007). Beginners’ Guide to Financial Statements. sec.gov/about/reports-publications/investorpubsbegfinstmtgui…
  35. Dahlquist, J. & Knight, R. (2022). Principles of Finance, section 6.1, “Ratios: Condensing Information into Smaller Pieces”. OpenStax. openstax.org/books/principles-finance/pages/6-1-ratios-conde…