Financial Statement Analysis: An Introduction

Question 1

Financial Statement Analysis

Answer 1

Use the information in a company’s financial statements, along with other relevant information to make economic decisions

Question 2

The financial statement that states a firms financial position at a point in time.

Answer 2

Balance Sheet

Question 3

A Balance Sheet has 3 items contained in it:

Answer 3

1. Assets
2. Liabilities
3. Owners’ Equity – residual interest in net assets of an entity that remains after deducting liabilities.

Question 4

Assets =

Answer 4

Liabilities + Owners’ Equity

Question 5

A financial statement that reports all changes in equity except for shareholder transactions. (i.e. issuing/repurchasing stock, dividends paid)

Answer 5

Statement of Comprehensive Income

Question 6

A financial statement that reports the financial performance of the firm over a period of time.

Answer 6

Income Statement

Question 7

3 components of the Income Statement

Answer 7

1. Revenue – inflows from delivering or producing goods, rendering services, or other services that constitute the entity’s ongoing major or central operations.
2. Expenses - The outflows from delivering or producing goods or services that constitute the entity’s ongoing major or central operations.
3. Other Income includes gains that may or may not arise in the ordinary course of business

Question 8

Financial Statement that reports the amounts and sources of changes in equity investors’ investment in the firm over a period of time.

Answer 8

Statement of Changes in Equity

Question 9

Financial Statement that reports the company’s cash receipts and payments

Answer 9

Statement of Cash Flows

Question 10

Types of Cash Flows on the statement of cash flows

Answer 10

1. Operating cash flows: include the cash effects of transactions that involve the normal business of the firm.
2. Investing cash flows: those resulting from the acquisition or sale of the property, pant and equipment, of a subsidiary or segment, of securities and of investments in other firms.
3. Financing cash flows: those resulting from issuance or retirement of the firms debt and equity securities. Including dividends paid to stockholders.

Question 11

Financial statement notes provide extra information summarized in the financial statements

Answer 11

…including accounting methods used, assumptions and fiscal period dates.
* Management commentary discusses performance, macroeconomic landscape and outlooks

Question 12

Management Discussion and Analysis (MD&A) must include

Answer 12

1. Effects of inflation and the changing prices of materials
2. Impact of the off-balance-sheet obligations and contractual obligations
3. Accounting policies that require significant judgment by management
4. Forward looking expenditures and divestment

Question 13

Standard Auditors’ Opinion characteristics::

Answer 13

1. Auditor has performed an independent review
2. Used generally accepted auditing techniques, providing reasonable assurance that the financial statements contain no material errors
3. The auditor is satisfied with statements prepared in accordance with accepted principles

Question 14

An unqualified auditors’ opinion:

Answer 14

The auditor believes the statements are free from material omissions and errors.

Question 15

A qualified auditors’ opinion:

Answer 15

if statements make any exceptions to the accounting principles.

Question 16

Adverse opinion:

Answer 16

if statements are not presented fairly or are materially non-conforming

Question 17

Disclaimer of opinion is issued if the auditor is unable to express an opinion.

Answer 17

…

Question 18

There are six steps in the financial statement analysis framework:

Answer 18

1. State the objective and context: what question does the analysis seek to offer
2. Gather data
3. Process the data
4. Analyze and interpret data
5. Report conclusions or recommendations
6. Update Analysis

Question 19

Proxy statements contain:

Answer 19

information related to matters the come before shareholders. (i.e. executive compensation, etc.)