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Ratio Analysis and Statement of Cash Flows

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Target vs. WalMart summary comparing the companies two most recent fiscal years based upon based upon the following: Risk Management

Select and calculate 3 financial ratios from Chapter 17 in Fundamentals of Corporate Finance, by Brealey for both fiscal years addressing the above topics. Finally, evaluate the annual and year-to-year results to interpret the importance of these ratios as applied to their companies and in comparison to the entire industry.

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Solution Preview

In financial analysis, we need qualitative information and try to read between the numbers. We have to ask all the right questions. Over the years, there are some ratios, which have become more popular and handy for rule of thumb analysis of financial statements. Our purpose in this note is not deride them but to advice the reader to use them properly to derive the correct results.
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In other words it helps in inter firm and intra firm comparison.
(Pandey, I.M.)

Risk Management
However, although both companies have their individual risks, both are subjected to the following:
? Market risks
? Workforce ...

Solution Summary

This solution explains how to conduct a financial analysis on Target and Walmart and identifies the risks that both companies experience in the market. It also selects the three financial ratios of debt equity, debt ratio and times-interest-earned ratio for each company to provide a comparison of the fiscal years.

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I need some assistance in answering the questions below.

1. Why are companies required to prepare a statement of cash flows? Why is the statement of cash flows divided into three sections? What does each section tell you about a company's operations?

2. What are some common ratios used to analyze financial information? Which are the most important? What are some examples of how ratios are used in the decision-making process?

3. What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board allow both methods? Which do you prefer? Why?

4. Two popular methods of financial statement analysis are horizontal analysis and vertical analysis. What are the differences between these two methods?

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