19.1: Financial Statement Roles

Question 1

What is financial reporting?

Answer 1

Financial reporting refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements.

Question 2

What is financial statement analysis? How is it used?

Answer 2

Financial statement analysis is the use of information in a company’s financial statements, along with other relevant information, to make economic decisions.

It is used to evaluate a company’s past performance and current financial position in order to form opinions about the company’s ability to earn profits and generate cash flow in the future.

Question 3

What is balance sheet? What equation is used to define the three elements?

Answer 3

Balance sheet reports the firm’s financial position at a point in time.

Assets = liabilities + owners’ equity

Question 4

What is capital structure?

Answer 4

Capital structure refers to the proportions of liabilities and equity used to finance a company.

Question 5

What is the statement of comprehensive income?

Answer 5

Statement of comprehensive income reports all changes in equity except for shareholder transactions (such as issuing stocks, repurchasing stock, paying dividends)

Question 6

What is the income statement? What are the four elements?

Answer 6

Income statement reports the financial performance of a firm over a period of time.

Four elements:

• gains
• losses
• revenues
• expenses

Question 7

What is the statement of changes in equity?

Answer 7

Statement of changes in equity reports the amounts and sources of changes in equity investors’ investment in the firm over a period of time.

Question 8

What is the statement of cash flow? What are its 3 classifications?

Answer 8

Statement of cash flow reports the company’s cash receipts and payments.

3 classifications:

1. CFO - transactions in the normal course of business
2. CFI - acquisition/sale of PPE; subsidiary or segment; securities; investments in other firms
3. CFF - issuance or retirement of the firm’s debt and equity securities and include dividends paid to stockholders

Question 9

Define owners’ equity.

Answer 9

Owners’ equity is the residual interest in the net assets of an entity that remains after deducting its liabilities from its assets.