An Introduction

Question 1

What is the role of financial reporting?

Answer 1

To provide a variety of users with useful information about a company’s performance and financial position.

Question 2

What is the role of financial statement analysis?

Answer 2

The role of financial statement analysis is to use the data from financial statements to support economic decisions.

Question 3

What does the balance sheet show?

Answer 3

Assets, liabilities, and owners’ equity at a point in time.

Question 4

What does the statement of comprehensive income show?

Answer 4

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.

Question 5

What does the statement of changes in equity show?

Answer 5

The amount and sources of changes in the equity owners’ investment in the firm.

Question 6

What does the statement of cah flows show?

Answer 6

The sources and uses of cash over the period.

Question 7

What kind of information is contained in the financial statement footnotes and disclosures?

Answer 7

• 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.

Question 8

What does MD&A contain?

Answer 8

1. Management’s discussion and analysis
2. 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 judgment.

Question 9

What is the objective of audits of financial statements?

Answer 9

Tto provide an opinion on the statements’ fairness and reliability.

Question 10

What is a company’s management responsible for?

Answer 10

Maintaining an effective internal control system to ensure the accuracy of its financial statements.

Question 11

What are some important information sources outside of the annual financial statements?

Answer 11

1. A company’s quarterly and semiannual reports,
2. Proxy statements,
3. Press releases,
4. Earnings guidance,
5. Information on the industry and peer companies from external sources.

Question 12

What are the six steps to the framework for financial analysis?

Answer 12

1. State the objective of the analysis.
2. Gather data.
3. Process the data.
4. Analyze and interpret the data.
5. Report the conclusions or recommendations.
6. Update the analysis.

Question 13

What is the basic accounting equation?

Answer 13

assets = liabilities + owners’ equity

Question 14

What is the expanded accounting equation?

Answer 14

assets = liabilities + contributed capital + beginning retained earnings + revenue −
expenses − dividends

Question 15

Changes in balance sheet accounts during an accounting period are reflected in which three statements?

Answer 15

1. The income statement,
2. The cash flow statement, and
3. The statement of owners’ equity.

Question 16

What is the objective of financial statements?

Answer 16

To provide economic decision makers with useful information about a firm’s financial performance and changes in financial position.