Basics Flashcards
What is a financial statement Analysis ?
A FSA is a detailed investigation of a company’s financial Statements to understand its performance in detail to make key decisions on lending, borrowing and investment decisions.
Why is FSA (Financial Statement Analysis) Important? How does it help decision makers ?
Financial statement analysis helps decision makers understand 3 key aspects:
1. The past performance of the entity
2. Detailed breakdown of the company’s financial matrix and its performance overtime.
3. Indicators about the company’s future performance
Why is FSA (Financial Statement Analysis) Important? How does it help decision makers ?
Financial statement analysis helps decision makers understand 3 key aspects:
1. The past performance of the entity
2. Detailed breakdown of the company’s financial matrix and its performance overtime.
3. Indicators about the company’s future performance
What are the different financial statements?
To understand a company’s financial statement there are 3 statements that would need to be evaluated along with the notes to accounts.
- Balance Sheet:- is a presentation of everything that a company owns (assets) and owes (liabilities).
-
Profits & Loss Statement: shows the total sales that a
company has minus the expenses that it has incurred in a given time frame. - Cash flow Statement: shows all the inflows and outflows - for operations, investing, & financing for a company in a particular time frame.
who uses financial statement analysis?
- Banks: They need to calculate Interest Coverage Ratio - % = Earnings Before Interest & taxes // Interest expenses.
**Debt Equity Ratio ** = Total Debt / Total equity
Others include Business Owners (Capital, Invt. Decisions, picking a project to invest in), Entrepreneurs, Credit Rating . Agencies ( that assign ratings to companies based on their creditworthiness Like AAA, AA, A, B, BBB etc. These ratings can effect the borrowing ratings of a borrower company.)
what are the different components of Financial statement?
The financial report both consolidated and standalone include various components such as Auditor’s reports, Balance Sheet, Note to Accounts, Cash flow Statements, Statement of profit & loss, Statement of changes in equity & Accounting Policy.
How to normalize the data?
The changes that need to be made so that data reflects reality more closely are the following:
- Remove one-offs: One-offs are non - recurring events that do not happen every year. These are events that can make a company’s financials cook really good or bad in a particular year. Since these events (outliers) do not repeat every year they need to be removed from financial statement.
Examples: 1. loss due to fire or accident, 2. Huge profits on trading (one-time), 3. Profit or loss on the sale of subsidiaries.
- Discontinued Activities: Business Activities that have been stopped or sold off. They need to be removed from income statements and cash-flows. Since these activities ( business onits or products or services) have no impact on the future and therefore future decision making.
What are the two types of financial statements? Define them.
- . Standalone FS: includes the profit & loss & assets & liabilities of only the core company. (parent company) .
- Consolidated FS: is where with the parent company, all its subsidiaries, joint ventures, majority shareholdings, etc will also be included. The sales, revenue, and profits generated by all these entities along with the parent company.
- always go for consolidated statement*
What do you find in a auditor’s report?
The auditors report includes an opinion about the given set of financial statements of a company. There are four kinds of opinion:
- Unqualified Opinion: Clean& clear opinion given by the auditor about the practices of the company. It is the best opinion an auditor can give when they think that everything disclosed by the company is correct. * Thiele proof of good accounting practices & shows good Systems are in place.
- Qualified Opinion: The auditor opines that something’s not right. This kind of opinion falls between a negative and positive opinion - where the auditor refrains from giving an unqualified opinion, butat the same time not giving a negative opinion. They cannot say if something is wrong, but they cannot confidently say that all systems are in place. * This kind of opinion means one needs to be cautions about investing in the company. It is often a redflag to investors.*
- Negative Opinion: The auditor clearly says that something going on in the company is wrong. This implies that the disclosed financial statements does not provide a clear picture of the company’s practices and it is not an accurate representation of the company’s health.
- No opinion given: when the auditor discontinues the audit and decides not to give an opinion. In this case they are not happy with the FA statements or the status of the company. A walk out.
What are accounting Policies?
Each company has a set of rules that the use to enter into their accounting system.It is clearly mentioned in their accounting policies of thecompany and compulsory to disclose dong with FSAs.
For eg. what do they consider as realised revenue - when order is recieved or dispatched or when delivered …
** while considering accounting policies there are two important points: 1) check if you agree with their policies, 2) it the accounting policies have changed in the current year as compared to the previous year. [ The nos you see for the may have improved but the reason behind it could be a change in their accounting policies.]**
While discussing the balance sheet & profit & loss statement, what are the different 2 items that can be categorized?
The two types of items are Financial assets or items and operating items.
What are the different types of financial assets or items?
The different types of financial items) assets are:
-1. Different types of investment in mutual funds
2. investment in Other assets Like associates which are financial in nature and not strategic.
3. Any type of debt that the company may have taken.
4. Loans & advances
What are the different types of operating items and assets that are required for day to day operations ?
** 1. Account Receivables (AR) : when the company sells goods on credit.
- Inventory
- Cash required for running the business
- Advance received from customers
- Prepaid Expenses: are payments made for goods & services that will be used in the future. They are considered as assets because the company has already paid for them. Like insurance premium, rents etc.
- Accounts Payable: refers to the amount a company owes to its suppliers and vendors for goods and services received but not paid for.
