Financial Reporting & Analysis Flashcards
Describe the roles of financial reporting and financial statement analysis;
- Providing information:
- Financial Position- Performance: profitability & cash flows
- Evaluation:
- To form expectations about a company’s future
performance and financial position
- To form expectations about a company’s future
Describe the roles of the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows in
evaluating a company’s performance and financial position;
- Providers of capital =
Assets: resource controlled
Liabilities: what is owed
Equity: residual claim on assets / net assets, minority interest - P & L: revenue + other income - expenses - losses = N.I.
Statement of Comprehensive income: All items that change owner’s equity except for TRNs w owners.
P&L - FV changes from CF hedges - exchange differences. - Statement of CF: operating, financing, investing (inv. >3m)
Describe the importance of financial statement notes and supplementary information—including
disclosures of accounting policies, methods, and estimates—and management’s commentary;
- MD & A: not audited, objectives, strategies, significant risks
- Notes: policies, methods, estimates
- Proxy statement: for shareholders
Describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls;
Audit: annual statements only, fair representation, express opinion, internal controls:
unqualified (preferred), qualified (except..), adverse, disclaimer (no data)
- Reasonable assurance the .. fairly represented
- Ensure the company’s process for generating financial reports is sound
Identify and describe information sources that analysts use in financial statement analysis besides annual financial statements and supplementary
information;
- Debt rating or bond issue by performing financial statement analysis.
- Be aware of accounting difference wrt choices
- Press releases: periodic earnings announcemnet
Describe the steps in the financial statement analysis framework.
- Purpose
- Collect data
- Process data
- Analyze / interpret (ratios)
- Communicate conclusions
- Follow up (producing updating reports & recommendations)
Describe how business activities are classified for financial reporting purposes;
- Operating - day to day (interest income if bank)
- Investing - CAPEX (NCA), debt sec (interest income if non-bank)
- Financing - Debt/equity (NCL), buying back shares
Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements;
- Assets (resources)
liabilities (Creditor claims), paid by credit (aka trade payables)
Equity: contributed capital + beg. retained earning + N.I. - dividends - Revenue, expenses
Explain the accounting equation in its basic and expanded forms;
- Statement of Retained Earnings:
beg RE + NI - DIV = ending R.E.
Describe the process of recording business transactions using an accounting system based on the accounting equation;
Assets (prepaid expense, inventory, depreciation expense, unbilled rev, prepaid expense, marketable sec/equity instryments)
Liabilities (Accrued rev/expense, reserves)
GL: business TRN by account
Describe the need for accruals and valuation adjustments in preparing financial statements;
Accruals: matching principle, receive revenue but not delivered service yet = liability unearned revenue
Describe the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity;
IFRS: valuation adjustments = current market value & unrealized gains ->
Trading investments: P&L.
Available for sale: comprehensive income
Describe the flow of information in an accounting system;
Contra account: allowance for bad debts, accumulated depreciation
Describe the use of the results of the accounting process in security analysis.
- Analyst need to assess: reasonabless of managemen’s judgements and estimates
- Review for items of fictitious assets or liabilities that might be manipulating.
Describe the objective of financial statements and the importance of financial reporting standards in security analysis and valuation;
- Provide financial information that is useful to existing/potential investors, creditors, in making decisions about providing resources.
- Requires policiy choices & estimates (standards)
Describe roles and desirable attributes of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting
standards, and describe the role of the International Organization of Securities Commissions;
- Standard setting bodies = make the rules
IASB, FASB - Regulatory Authorities = enforce the rules
IOSCO
=> rules-based, principles-based, objectives approach
SEC: forms 10-K & proxy statement
IOSCO: assist in attaining the goal of uniform regulation and cross-border co-operation in combating violations of securities en derivatives laws.
Describe the status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of financial reporting standards;
=> convergence of standards
=> IFRS: sets forth the concetps that underlie presentation/preparation of fin. st. for external users.
Fundamental characteristics: relevance, faithful representation.
Enhancing characteristics: comparability,timeliness, understandability, verifiability.
=> underlying assumptions: - going concern, - accrual basis.
Describe general requirements for financial statements under International Financial Reporting Standards (IFRS);
- Prepared at least annually
- Must include comparative information
- Classified balance sheet
4.
Identify characteristics of a coherent financial reporting framework and the barriers to creating such a framework;
- Transparency
- Comprehensiveness
- Consistency
Constraints:
- Benefit versus cost
- Balancing of qualitative characteristics
Analyze company disclosures of significant accounting policies.
Orderly disposal = realizable value
Describe the components of the income statement and alternative presentation formats of that statement;
- Multi step vs Single step: single step has all expenses listed as one.
Describe general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term
contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for financial analysis;
- Delivery
- Delivery before sale: % of completion if outcome is
- probable (cost, sell price, and getting paid).
- not probable: IFRS recognize rev up to cost vs GAAP recognize rev until completion - Delivery after sale:
- Installment: IFRS PV of payments, GAAP % of total profit each year based on % received.
- Cost of Recovery: no profit until costs recovered.
Describe general principles of expense recognition, specific expense recognition applications, and implications of expense recognition choices for financial analysis;
- FIFO
- LIFO (GAAP only)
- Avg Cost
=> doubtful accounts, warranties, depreciation (TA)/amortization(ITA)
=> IFRS Valuation: cost-depreciation, revaluation (FV)
GAAP valuation: cost depreciation
