25 - Intro to FS Analysis

Question 1

Financial reporting is what

Answer 1

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

Question 2

what is the role of financial statement analysis

Answer 2

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

Question 3

examples of using financial statement analysis

Answer 3

examples of such decisions include whether to invest in the company’s securities or recommend them to investors and whether to extend trade or bank credit to the company. Analysts use financial statement data to evaluate a company’s past performance and current financial position in order to form opinions about the company’s ability to earn pro its and generate cash flow in the future.

Question 4

what is The balance sheet

Answer 4

The balance sheet (also known as the statement of financial position or statement of financial condition) reports the firm’s financial position at a point in time.

Question 5

The balance sheet consists of three elements:

Answer 5

The balance sheet consists of three elements:

1. Assets are the resources controlled by the irm.
2. Liabilities are amounts owed to lenders and other creditors.
3. Owners’ equity (also shareholders’ equity, shareholders’ funds, or net assets) is the residual interest in the net assets of an entity that remains after deducting its liabilities from its assets.

Question 6

fundamental accounting equation

Answer 6

Transactions are measured so that the fundamental accounting equation holds: assets = liabilities + owners’ equity

Question 7

what is a company’s capital structure?

Answer 7

The proportions of liabilities and equity used to finance a company are known as the company’s capital structure.

Question 8

what does the The statement of comprehensive income report?

Answer 8

The statement of comprehensive income reports all changes in equity except for
shareholder transactions (e.g., issuing stock, repurchasing stock, and paying dividends)

Question 9

what does The income statement report on?

what is another name for it?

Answer 9

The income statement (also known as the statement of operations or the profit and loss statement) reports on the financial performance of the firm over a period of time. The elements of the income statement include revenues, expenses, and gains and losses.

Question 10

what are revenues?

Answer 10

Revenues are inflows from delivering or producing goods, rendering services, or
other activities that constitute the entity’s ongoing major or central operations.

Question 11

what are expenses?

Answer 11

Expenses are outflows from delivering or producing goods or services that
constitute the entity’s ongoing major or central operations.

Question 12

what is an other income?

Answer 12

Other income includes gains that may or may not arise in the ordinary course of
business.

Question 13

what is the a single statement of comprehensive income are combination of?

Answer 13

The income statement can be combined with “other comprehensive income” and
presented as a single statement of comprehensive income. Alternatively, the income statement and the statement of comprehensive income can be presented separately.

Question 14

what does the statement of changes in equity report?

Answer 14

The 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 15

what does the statement of cash flows report

Answer 15

The statement of cash flows reports the company’s cash receipts and payments. T

Question 16

what are the diff types of cash flows classifications

Answer 16

• Operating cashflows include the cash effects of transactions that involve the normal business of the firm.
• Investing cashflows are those resulting from the acquisition or sale of property, plant, and equipment; of a subsidiary or segment; of securities; and of investments
  in other firms.
• Financing cash flows are those resulting from issuance or retirement of the firm’s
  debt and equity securities and include dividends paid to stockholders

Question 17

what is a Operating cashflow

Answer 17

• Operating cashflows include the cash effects of transactions that involve the normal business of the firm.

Question 18

what is a Investing cashflow

Answer 18

• Investing cashflows are those resulting from the acquisition or sale of property, plant, and equipment; of a subsidiary or segment; of securities; and of investments
  in other firms.

Question 19

what is a Financing cash flows

Answer 19

-Financing cash flows are those resulting from issuance or retirement of the firm’s
debt and equity securities and include dividends paid to stockholders

Question 20

what do financial statement notes do?

what is another term for this

Answer 20

Financial statement notes (footnotes) include disclosures that provide further details about the information summarized in the financial statements. Footnotes allow users to improve their assessments of the amount, timing, and uncertainty of the estimates reported in the financial statements. Footnotes: Discuss the basis of presentation such as the fiscal period covered by the
statements and the inclusion of consolidated entities.
Provide information about accounting methods, assumptions, and estimates used by management.
Provide additional information on items such as business acquisitions or disposals,
legal actions, employee benefit plans, contingencies and commitments, significant
customers, sales to related parties, and segments of the firm.

Question 21

another term for Management’s commentary

Answer 21

[also known as management’s report, operating and

financial review, and Management’s Discussion and Analysis (MD&A)]

Question 22

what does the Management’s commentary consist of?

Answer 22

is one of the most useful sections of the annual report.

In this section, management discusses a variety of issues. IFRS guidance recommends that management commentary address the nature
of the business, management’s objectives, the company’s past performance, the
performance measures used, and the company’s key relationships, resources, and risks.

Analysts must be aware that some parts of management’s commentary may be unaudited.

Question 23

what must analysts be aware of what in comes to managements commentary

Answer 23

Analysts must be aware that some parts of management’s commentary may be
unaudited.

Question 24

for publicly held firms in the US what does the SEC require that the MD&A do? 5

Answer 24

For publicly held firms in the United States, the SEC requires that MD&A discuss trends
and identify signiicant events and uncertainties that affect the irm’s liquidity, capital resources, and results of operations.

MD&A must also discuss:
- Effects of inlation and changing prices if material.

• Impact of off-balance-sheet obligations and contractual obligations such as
  purchase commitments.
• Accounting policies that require signiicant judgment by management.
• Forward-looking expenditures and divestitures.

Question 25

what is an audit

Answer 25

audit is an independent review of an entity financial statements.

Question 26

what is the objective

of an audit

Answer 26

The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the inancial statements

Question 27

who is responsible for seeing that the financial statements conform to the applicable accounting
standards?

Answer 27

The independent certiied public accounting irm employed by the Board of Directors is
responsible for seeing that the inancial statements conform to the applicable accounting
standards.

Question 28

how many parts is there of a standard auditors report? what do they state?

Answer 28

The standard auditor’s opinion contains three parts and states that:
1. Whereas the inancial statements are prepared by management and are its
responsibility, the auditor has performed an independent review.
2. Generally accepted auditing standards were followed, thus providing reasonable
assurance that the inancial statements contain no material errors.
3. The auditor is satisied that the statements were prepared in accordance with
accepted accounting principles and that the principles chosen and estimates made
are reasonable. The auditor’s report must also contain additional explanation when
accounting methods have not been used consistently between periods.

Question 29

what does an unqualified opinion mean in an audit

Answer 29

An unqualiied opinion (also known as an unmodiied or clean opinion) indicates that the
auditor believes the statements are free from material omissions and errors.

Question 30

what does an qualified opinion mean in an audit

Answer 30

The auditor can issue
an adverse opinion if the statements are not presented fairly or are materially
nonconforming with accounting standards

Question 31

what does a disclaimer of opinion mean in an audit

Answer 31

if the auditor is unable to express an opinion (e.g., in the case of a scope limitation), a disclaimer of opinion is issued.

Question 32

what does a modified opinions mean

Answer 32

Any opinion other

than unqualified is sometimes referred to as a modified opinion.

Question 33

what is the going concern assumption

Answer 33

The auditor’s opinion will also contain an explanatory paragraph when a material loss is
probable but the amount cannot be reasonably estimated. These “uncertainties” may
relate to the going concern assumption (the assumption that the irm will continue to
operate for the foreseeable future), the valuation or realization of asset values, or to
litigation. This type of disclosure may be a signal of serious problems and may call for
close examination by the analyst

Question 34

what does the going concern assumption indicate

Answer 34

This type of disclosure may be a signal of serious problems and may call for
close examination by the analyst.

Question 35

what are Internal controls

Answer 35

Internal controls are the processes by which the company ensures that it presents
accurate inancial statements. Internal controls are the responsibility of management.
For publicly traded irms in the United States, the auditor must express an opinion on the
irm’s internal controls. The auditor can provide this opinion separately or as the fourth
element of the standard opinion.

Question 36

what must an audit report contain?

Answer 36

An audit report must also contain a section called Key Audit Matters (international
reports) or Critical Audit Matters (U.S.) which highlights accounting choices that are of greatest signiicance to users of inancial statements. These would include accounting choices that require signiicant management judgments and estimates, how signiicant transactions during a period were accounted for, or choices the auditor inds especially challenging or subjective and which therefore have a signiicant likelihood of being misstated.

Question 37

Besides the annual inancial statements, what should an analyst examine

Answer 37

Besides the annual inancial statements, an analyst should examine a company’s quarterly
or semiannual reports.

These interim reports typically update the major inancial
statements and footnotes but are not necessarily audited.