CFA 22: Financial statement Analysis: An Introduction

Question 1

liquidity

Scope of Financial Statement Analysis

Answer 1

Liquidity is the ability to meet short-term obligations.

Question 2

solvency

Scope of Financial Statement Analysis

Answer 2

Solvency is the ability to meet long-term obligations

Question 3

balance sheet

Major Financial Statements and Other Information Sources

Answer 3

The balance sheet presents a company’s current financial position by disclosing the resources the company controls (assets) and its obligations to lenders and other creditors (liabilities) at a specific point in time.

Question 4

owner’s equity

Major Financial Statements and Other Information Sources

Answer 4

Owners’ equity represents the excess of assets over liabilities.

Question 5

revenue

Major Financial Statements and Other Information Sources

Answer 5

Revenue typically refers to amounts charged for the delivery of goods or services in the ordinary activities of a business.

Question 6

expenses

Major Financial Statements and Other Information Sources

Answer 6

Expenses reflect outflows, depletions of assets, and incurrences of liabilities that decrease equity. Expenses typically include such items as cost of sales (cost of goods sold), administrative expenses, and income tax expenses and may be defined to include losses.

Question 7

statement of operations (profit and loss statement)

Major Financial Statements and Other Information Sources

Answer 7

This is the income statement. The base equation underlying the income statement is:

Revenue + Other Income - Expenses 
=
Income - Expenses
=
Net Income

Question 8

diluted shares

Major Financial Statements and Other Information Sources

Answer 8

Diluted shares are the number of shares that would hypothetically be outstanding if pontentially dilutive claims on common shares (stock options or convertible bonds) were exercised or converted by their holders - and an appropriately adjusted profit or loss attributable to the common shareowners.

Question 9

financial flexibility

Major Financial Statements and Other Information Sources

Answer 9

Financial flexibility is the ability of the company to react and adapt to financial adversities and opportunities.

Question 10

operating activities

Major Financial Statements and Other Information Sources

Answer 10

Operating activities are those cash flows not classified as investing or financing and generally involve the cash effects of transactions that enter into the determination of net income and, hence, comprise the day-to-day operations of the company.

Question 11

investing activities

Major Financial Statements and Other Information Sources

Answer 11

Investing activity cash flows are those from activities associated with the acquisiiton and disposal of long-term assets, such as property and equipment.

Question 12

financing activities

Major Financial Statements and Other Information Sources

Answer 12

Financing activity cash flows are those from activies related to obtaining or repaying capital to be used in the business.

Question 13

depreciation

Major Financial Statements and Other Information Sources

Answer 13

Depreciation is the process of systematically allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.