Financial Statement Analysis

Question 1

Why internal users need Financial Statements?

Answer 1

Internal users of financial statements use them for a variety of purposes, including decision making, performance evaluation, budgeting and forecasting, compliance, and stakeholder communication.

Question 2

Why external users need Financial Statements?

Answer 2

External users of financial statements use them for a variety of purposes, including investment decisions, creditworthiness assessment, regulatory compliance, market analysis, and stakeholder communication.

Question 3

What is common-size financial statements?

Answer 3

Common-size financial statements are financial statements that present information as a percentage of a base figure. This makes it easier to compare financial information across different periods of time or between different companies, as it adjusts for differences in the scale of operations.

Question 4

What does vertical analysis or common size analysis interprets?`

Answer 4

Vertical Analysis helps to identify the trends and patterns in the financial performance and position of the organization over time, and is useful in making informed decisions.

Question 5

Who have the direct interest to FS?

Answer 5

> Investors and owners
Management
Suppliers
Creditors
Employees
Customers

Question 6

Who are the indirect interest users of FS?

Answer 6

> Regulatory agencies
Stock markets
Financial analysts

Question 7

Who are the Internal users who make decisions impacting the operations and long-term viability of an organization?

Answer 7

> Board of directors
Company management
Employees

Question 8

Who are the external users who determine whether they will invest in or do business with the organization?

Answer 8

> Investors
Suppliers
Customers
Stock exchanges
Regulatory agencies

Question 9

What are the `four statements are required by GAAP

Answer 9

> Statement of Financial Position
Statement of Profit and loss
Statement of Changes in Equity
Statement of Cashflow”

Question 10

What does the statement of cash flow reconciles?

Answer 10

The statement of cash flows reconciles the net change in cash balance by showing the cash inflows and outflows that have taken place during the period being reported.

Question 11

What is the difference of income statement to statement of comprehensive income

Answer 11

The income statement shows revenues and expenses for a specific period to determine net income/loss, while the statement of comprehensive income includes all items affecting net income, realized or unrealized.

Question 12

What can information can we get to the statement of changes in equity?

Answer 12

It shows the various transactions that have impacted the equity of an organization, such as issuing new shares of stock, paying dividends, and reporting net income or loss.

Question 13

Difference between direct and indirect method of operating activities in statement of cash flow?

Answer 13

The direct method shows actual cash inflows/outflows in the operating activities section of the cash flow statement, while the indirect method starts with net income and adjusts to show cash flow from operations.

Question 14

Why do the indirect method of preparing the operating activities section of the cash flow statement changes in assets and liabilities are added or deducted?

Answer 14

The indirect method adjusts changes in assets/liabilities to reconcile net income to cash flow from operations in the operating activities section of the cash flow statement, providing a clearer picture of actual cash inflows/outflows from operations.

Question 15

What are some examples of activities to include in the investing activities section of the cash flow statement?

Answer 15

> Purchases or sales of investments such as stocks, bonds, or real estate.
Acquisition or disposition of property, plant, and equipment (PP&E)
Proceeds from the sale of a subsidiary or business segment.
Proceeds from the sale of intangible assets.
Capital expenditures for new construction or improvements to existing assets.
Repayment of debt securities, such as bonds or notes.
Repurchasing or issuance of company stock.

Question 16

What are some examples of activities to include in the financing activities section of the cash flow statement?

Answer 16

> Issuance of bonds, notes, or other debt securities.
Repayment of long-term debt or short-term borrowings.
Dividends paid to shareholders.
Proceeds from the issuance of common or preferred stock.
Repurchasing of company stock.
Payments made to settle debt or equity instruments.
Proceeds from the issuance of long-term debt.
Payments of lease obligations.

Question 17

What is the last part of the cash flow statement and what are the activities needed to be reported here?

Answer 17

Significant non-cash investing and financing activities is the last part of the statement

Question 18

What are the activities included under Significant non-cash investing and financing activities?

Answer 18

> Changes to long-term liabilities and stockholders’ equity
Conversion of debt to common stock and using long-term debt to finance the purchase of property, plant, and equipment.

Question 19

What is the difference between operating, investing, and financing activities on the cash flow statement?

Answer 19

Operating activities relate to the firm’s day-to-day business as reported in the income statement and include an analysis of current assets and current liabilities as they relate to the income statement. Investing activities include the cash flows from buying and selling long-term assets and the debt or equity securities (investments) of other entities. Financing activities relate to how the organization funds the assets used in operations. This includes an analysis of long-term liabilities and stockholders’ equity.

Question 20

What is the difference between horizontal and vertical analysis?

Answer 20

Vertical analysis compares the size of items on a financial statement, while horizontal analysis compares financial data over time

Question 21

What is the based to be use for vertical analysis in income statement

Answer 21

Net Sales

Question 22

What is the based to be use for vertical analysis in Balance sheet

Answer 22

Total Asset

Question 23

What are the 3 methods of horizontal analysis?

Answer 23

> Amount of change method
Percent change method
Percent of prior period method

Question 24

Because horizontal analysis compares the same amounts over a specified period of time, it is also referred to as:

Answer 24

Horizontal analysis is also referred to as trend analysis or time-series analysis.

Question 25

What is horizontal financial statement analysis?

Answer 25

Horizontal analysis is a method to track financial changes over time and is often referred to as trend analysis. It compares financial data from different time periods, usually by using a base period, to determine increases or decreases.