Book 3_FinAn_Reading 29_INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS Flashcards
The framework for financial analysis
- State the objective of the analysis.
- Gather data.
- Process the data.
- Analyze and interpret the data.
- Report the conclusions or recommendations.
- Update the analysis.
The role of financial reporting
to provide various users with useful information about a company’s performance and financial position.
The role of financial statement analysis
to use the data from financial statements to support economic decisions.
Standard-setting bodies
private sector organizations that establish financial reporting standards
The two primary standard-setting bodies
- the International Accounting Standards Board (IASB)
- in the United States, the Financial Accounting Standards Board (FASB).
Regulatory authorities
- 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
Many national regulatory authorities
belong to the International Organization of Securities Commissions (IOSCO).
the footnotes to the financial statements and supplementary schedules.
- 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
Management commentary
- 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.
The objective of audits
to provide an opinion on the statements’ fairness and reliability
The auditor’s opinion
- Verifies that appropriate accounting principles were used
- No material errors
- Management’s report on the company’s internal controls has been reviewed
an unqualified (clean) opinion
the statements are free from material omissions and errors
a qualified opinion
that notes any exceptions to accounting principles
an adverse opinion
if the statements are not presented fairly in the auditor’s opinion
a disclaimer of opinion
if the auditor is unable to express an opinion
Reporting standards
- ensure that different firms’ statements are comparable
- to narrow the range of reasonable estimates
Other important information sources for an analyst
- 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.
Proxy statements
- 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.
A business segment (operating segment)
a portion of a larger company that accounts for more than 10% of the company’s revenues, assets, or income
key audit matters (international reports) or critical audit matters (U.S.)
highlights accounting choices that are of greatest significance to users of financial statements
Proprietary third-party sources:
– Analyst reports
– Reports from data platforms such as Bloomberg, Wind, and FactSet
– Reports from industry-specific agencies and consultancies
Proprietary primary research
– 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
