(21) Financial Statement Analysis: An Introduction Flashcards
LOS 21. a: Describe the roles of financial reporting and financial statement analysis.
The role of financial reporting is to provide a variety of users with useful information about a company’s performance and financial position.
LOS 21. a: Describe the roles of financial reporting and financial statement analysis.
The role of financial statement analysis is to use the data from financial statements to support economic decisions.
LOS 21. b: Describe the roles of the statement of financial position, statement of comprehensive income, statements of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position.
The statement of financial position (balance sheet) shows assets, liabilities, and owners’ equity at a point in time.
LOS 21. b: Describe the roles of the statement of financial position, statement of comprehensive income, statements of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position.
The statement of comprehensive income shows the results of a firm’s business activities over the period. Revenues, the cost of generating those revenues, and the resulting profit or loss are presented on the income statement.
LOS 21. b: Describe the roles of the statement of financial position, statement of comprehensive income, statements of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position.
The statement of changes in equity reports the amount and sources of changes in the equity owners’ investment in the firm.
LOS 21. b: Describe the roles of the statement of financial position, statement of comprehensive income, statements of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position.
The statement of cash flows shows the sources and uses of cash over the period.
LOS 21. c: Describe the importance of financial statement notes and supplementary information – including disclosures of accounting policies, methods, and estimates – and management’s commentary.
Important information about accounting methods, estimates, and assumptions is disclosed in the footnotes to the financial statements and supplementary schedules. These disclosures also contain information about segment results, commitments and contingencies, legal proceedings, acquisitions or divestitures, issuance of stock options, and details of employee benefit plans.
LOS 21. c: Describe the importance of financial statement notes and supplementary information – including disclosures of accounting policies, methods, and estimates – and management’s commentary.
Management’s commentary (management’s discussion and analysis) contains an overview of the company and important information about business trends, future capital needs, liquidity, significant events, and significant choices of accounting methods requiring management judgement.
LOS 21. d: Describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.
The objective of audits of financial statements is to provide an opinion on the statements’ fairness and reliability.
The auditor’s opinion gives evidence of the independent review of the financial statements that verifies that appropriate accounting principles were used, that standard auditing procedures were used to establish reasonable assurance that the statements contain no material errors, and the management’s report on the company’s internal controls have been reviewed.
LOS 21. d: Describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.
An auditor can issue an unqualified (clean) opinion if the statements are free from material omissions and errors, a qualified opinion that notes any exceptions to accounting principles, an adverse opinion if the statements are not presented fairly in the auditor’s opinion, or a disclaimer of opinion if the auditor is unable to express an opinion.
LOS 21. d: Describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.
A company’s management is responsible for maintaining an effective internal control system to ensure the accuracy of its financial statements.
LOS 21. e: Identify and describe information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information.
Along with the annual financial statements, important information sources for an analyst include a company’s quarterly and semiannual reports, proxy statements, press releases, and earnings guidance, as well as information on the industry and per companies form external sources.
LOS 21. f: Describe the steps in the financial statement analysis framework.
The framework for financial analysis has six steps:
- State the objective of the analysis
- Gather data
- Process the data
- Analyze and interpret the data
- Report the conclusions or recommendations
- Update the analysis
