Book 3_FinAn_Reading 29_INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS

Question 1

The framework for financial analysis

Answer 1

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 2

The role of financial reporting

Answer 2

to provide various users with useful information about a company’s performance and financial position.

Question 3

The role of financial statement analysis

Answer 3

to use the data from financial statements to support economic decisions.

Question 4

Standard-setting bodies

Answer 4

private sector organizations that establish financial reporting standards

Question 5

The two primary standard-setting bodies

Answer 5

• the International Accounting Standards Board (IASB)
• in the United States, the Financial Accounting Standards Board (FASB).

Question 6

Regulatory authorities

Answer 6

• are government agencies that enforce compliance with financial reporting standards
• include the Securities and Exchange Commission (SEC) in the United States and the Financial Conduct Authority in the United Kingdom

Question 7

Many national regulatory authorities

Answer 7

belong to the International Organization of Securities Commissions (IOSCO).

Question 8

the footnotes to the financial statements and supplementary schedules.

Answer 8

• Important information about accounting methods, estimates, and assumptions
• Information about segment results, commitments and contingencies, legal proceedings, acquisitions or divestitures, issuance of stock options, and details of employee benefit plans

Question 9

Management commentary

Answer 9

• 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 10

The objective of audits

Answer 10

to provide an opinion on the statements’ fairness and reliability

Question 11

The auditor’s opinion

Answer 11

• Verifies that appropriate accounting principles were used
• No material errors
• Management’s report on the company’s internal controls has been reviewed

Question 12

an unqualified (clean) opinion

Answer 12

the statements are free from material omissions and errors

Question 13

a qualified opinion

Answer 13

that notes any exceptions to accounting principles

Question 14

an adverse opinion

Answer 14

if the statements are not presented fairly in the auditor’s opinion

Question 15

a disclaimer of opinion

Answer 15

if the auditor is unable to express an opinion

Question 16

Reporting standards

Answer 16

• ensure that different firms’ statements are comparable
• to narrow the range of reasonable estimates

Question 17

Other important information sources for an analyst

Answer 17

• a company’s quarterly and semiannual reports,
• proxy statements,
• press releases,
• and earnings guidance, as well as information on the industry and peer companies from external sources.

Question 18

Proxy statements

Answer 18

• are issued to shareholders when there are matters that require a shareholder vote9
• the election of (and qualifications of) board members, compensation, management qualifications, and the issuance of stock options.

Question 19

A business segment (operating segment)

Answer 19

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

Question 20

key audit matters (international reports) or critical audit matters (U.S.)

Answer 20

highlights accounting choices that are of greatest significance to users of financial statements

Question 21

Proprietary third-party sources:

Answer 21

– Analyst reports
– Reports from data platforms such as Bloomberg, Wind, and FactSet
– Reports from industry-specific agencies and consultancies

Question 22

Proprietary primary research

Answer 22

– Studies commissioned by the analyst
– Hands-on experience with the company’s products or services
– Data and advice of technical specialists employed by the analyst