27 Intro to Financial Statement Analysis

Question 1

What is the first step in the financial statement analysis framework?

Answer 1

State the objective and context

Question 2

What does the second step in the financial statement analysis framework involve?

Answer 2

Gather data

Question 3

What is the purpose of processing data in financial statement analysis?

Answer 3

Make appropriate adjustments, calculate ratios, and perform statistical analysis

Question 4

What is the goal of analyzing and interpreting the data in financial statement analysis?

Answer 4

Use the data to answer the questions stated in the first step

Question 5

What is involved in the fifth step of the financial statement analysis framework?

Answer 5

Report the conclusions or recommendations

Question 6

What does the sixth step in the financial statement analysis framework entail?

Answer 6

Update the analysis periodically

Question 7

What is financial reporting?

Answer 7

The way companies show their financial performance to investors, creditors, and other interested parties

Question 8

What role does financial statement analysis play?

Answer 8

It uses information from financial statements to make economic decisions

Question 9

What are some decisions influenced by financial statement analysis?

Answer 9

• Investing in securities
• Extending trade or bank credit
• Assigning credit ratings

Question 10

What are the two primary standard-setting bodies?

Answer 10

• Financial Accounting Standards Board (FASB)
• International Accounting Standards Board (IASB)

Question 11

What is the purpose of regulatory authorities?

Answer 11

To enforce compliance with financial reporting standards

Question 12

What does IOSCO stand for?

Answer 12

International Organization of Securities Commissions

Question 13

True or False: IOSCO is a regulatory body.

Answer 13

False

Question 14

What are the three main objectives of the IOSCO Objectives and Principles of Securities Regulation?

Answer 14

• Protecting investors
• Ensuring markets are fair, efficient, and transparent
• Reducing systemic risk

Question 15

What is the Sarbanes-Oxley Act of 2002 designed to promote?

Answer 15

Auditor independence

Question 16

What must management certify according to the Sarbanes-Oxley Act?

Answer 16

That the financial statements are presented fairly and the effectiveness of internal controls

Question 17

What do financial statement notes (footnotes) provide?

Answer 17

Further details about the information summarized in the financial statements

Question 18

What is a business segment defined as?

Answer 18

A portion of a larger company that accounts for more than 10% of the company’s revenues, assets, or income

Question 19

What information must be disclosed for each segment in the financial statement notes?

Answer 19

• Revenue (external and between segments)
• A measure of profit or loss
• A measure of assets and liabilities
• Interest (revenue and expense)
• Acquisitions of PP&E and intangibles
• Depreciation and amortization
• Other noncash expenses
• Income tax expense
• Share of equity-accounted investments results

Question 20

What is management commentary also known as?

Answer 20

Management report, operating and financial review, or management discussion and analysis (MD&A)

Question 21

What is the objective of an audit?

Answer 21

To provide an opinion on the fairness and reliability of the financial statements

Question 22

What does an unqualified opinion from an auditor indicate?

Answer 22

The statements are free from material omissions and errors

Question 23

What are internal controls?

Answer 23

Processes by which a company ensures accurate financial statements

Question 24

What must the auditor express an opinion on for publicly traded firms in the U.S.?

Answer 24

The firm’s internal controls

Question 25

What is one significant challenge for analysts when comparing IFRS and U.S. GAAP?

Answer 25

Differences between the two sets of standards

Question 26

What should analysts monitor to keep up to date with financial reporting standards?

Answer 26

Professional journals, IASB and FASB websites

Question 27

Fill in the blank: The auditor’s opinion will contain an explanatory paragraph when a material loss is _______.

Answer 27

probable