Financial Reporting and Analysis: Introduction Flashcards
Financial Statement Analysis: IASB Role of Financial Statement Analysis
“The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing an potential investors, lenders, and other creditors in make decisions about providing resources to the entity.
Those decisions involve buying, selling or holding equity and debt instruments, and providing or settline loans and other forms of credit.”
Financial Statement Analysis: Role of Financial Statement Analysis
- Using the information in a company’s financial statements, along with other relevant information to make economic decisions
- (e.g., evaluate securities, acquisitions, creditworthiness)
- To evaluate a company’s past performance and current financial posiition in order to form opinions about a firm’s ability to earn profits and generate cash flow in the future.
Financial Statement Analysis: Key Financial Statements: Income Statement
**Income Statement **(statement of operations or the profit and loss statement)
Summarizes events over a period:
- Revenues are inflows from delivering or producing good, rendering services, or ther activities that constitute the entity’s ongoing makor or central operations
- Expenses are outflows from delivering or producing goods or services that constitute the entity’s ongoing major or central operations
- Other income includes gains and losses which may or may not arise in ordinary course of business
Financial Statement Analysis: Key Financial Statements: Statement of Comprehensive Income & Balance Sheet
- Statement of comprehensive income **reports all changes in equity except for shareholder transactions
-
Balance sheet- a point in time
- Assets = liabilities + owners’ equity
- Assets are the resources controlled by the firm
- Liabilities are amound owed to lender and other creditors
- Owners’ equity is the residual interest in the net assets of an entity that remains after deduciting its liabilities
Financial Statement Analysis: Cash flow statement & Statement of Changes in Owners’ Equity
-
Cash flow statement reconciles beginning and ending cash balance, splitting changes into three categories:
- Operating cash flows (CFO)
- Investing cash flows (CFI)
- Financing cash flows (CFF)
- Statement of changes in owners’ equity–
amounts and sources of changes in shareholders’ equity over the period
Financial Statement Analysis: Footnotes and Supplementary Schedules
- Basis of presentation
- Accounting methods and assumptions
- Further information on amounts in primary statements
- Business acquisitions/disposals
- Contigencies
- Legal proceedings
- Stock option and benefit plans
- Significant customers
- Segment data
- Quarterly data
- Related-party transactions
Financial Statement Analysis: Management Discussion and Analysis
- Nature of the business
- Results from operations, business overview
- Trends in sales and expenses
- Capital resources and liquidity
- Cash flow trends
- Discussion of critical accounting choices
- Effects of inflation, price chanegs, and uncertainties on future results
Financial Statement Analysis: Audits
- Audit: Independent review of company’s financial statements
- **Reasonable assurance **that financial stataments are free of material errors
-
Audit opinion:
- Unqualified: “Clean” opinion
- **Qualified: **Exceptios to accounting principles
- **Adverse: **Statements not presented fairly
- **Disclaimer of opinion: **Unable to form an opinion
- Must provide opinion on company’s **internal controls **under U.S. GAAP
Financial Statement Analysis: Audit Report
- Responsibility of management to prepare accounts (independence of auditors)
- Properly prepared in accourdance with relevant GAAP (reasonable assurance that the statements are free from material misstatement
- Accountin principles and estimates chosen are reasonable
Financial Statement Analysis: Supplementary Sources of Information
- **Quarterly, semi-annual reports: **Updates of major financial statements and footnotes; SEC filings
- **Proxy statements: **Issued when shareholder vote is required; contain information on board elections, management compensation, stock options
- Corporate reports, press releases written by management
- **Economic, industry data **from trade journals, reporting services, government agencies
Financial Statement Analysis: Framework
- Purpose and context of analysis
- Collect data
- Process data
- Analyze/interpret data
- Conclusions and recommendations
- Update analysis periodically
Financial Statement Analysis: Financial Statements - Problem
Financial Reporting Mechanics: Common Asset Accounts
- Cash and cash equivalents
- Accounts receivable, trade receivables
- Prepaid expenses
- Inventory
- Property, plant, and equipment (PP&E)
- Investment property
- Intangibles
- Financial assets (investment securities)
- Investments under the equity method
- Deferred tax assets
Financial Reporting Mechanics: Common Liability Accounts
- Accounts payable, trade payables
- Provisions/accrued liabilities
- Financial liabilities
- Current and deferred tax
- Unearned revenue
- Debt payable
- Bonds
Financial Reporting Mechanics: Common Equity Accounts
- Capital at par value
- Additional paid-in capital
- Retained earnings
- Other comprehensive income
- Noncontrolling (minority) interest
Financial Reporting Mechanics: Common Income Statement Items
- Revenue
- Sales
- Gains
- Investment income
- Expenese
- Cost of goods sold
- SG&A (selling, general, and admin
- Depreciation/amortization
- Interest
- Tax expense
- Losses
Financial Reporting Mechanics: Accounting Equations
Financial Reporting Mechanics: Accounting for Transactions: Pay a bill & Sell a bond (borrow money)
E = A - L
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Pay a bill
- Assets “cash” goes down
- Liability “trade payables” goes down
- Equity is unchanged
-
Sell a bond (borrow money)
- Assets “cash” goes up by the proceeds
- Liability “bonds payable goes up by the proceeds
- Equity is unchanged