Financial Statement Roles (15.1)

Question 1

Describe the roles of financial reporting

Answer 1

Financial reporting refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements.

Question 2

Describe the role of financial statement analysis

Answer 2

The role of financial statement analysis is to use the information in a company’s financial statements, along with other relevant information, to make economic decisions.

Examples of such decisions include whether to invest in the company’s securities or recommend them to investors and whether to extend trade or bank credit to the company. Analysts use financial statement data to evaluate a company’s past performance and current financial position in order to form opinions about the company’s ability to earn profits and generate cash flow in the future.

Question 3

What are the statements use for evaluating a company’s performance and financial position

Answer 3

statement of financial position (aka balance sheet) , statement of comprehensive income, statement of changes in equity, and statement of cash flows

Question 4

what are the 3 elements a balance sheet consists of?

Answer 4

  1. Assets are the resources controlled by the firm.
2. Liabilities are amounts owed to lenders and other creditors.
3. Owners equity (also shareholders’ equity, shareholders’ funds, or net assets) is the residual interest in the net assets of an entity that remains after deducting its liabilities from its assets.

Question 5

What is the accounting equation?

Answer 5

Assets = Liabilities + Equity

Question 6

Describe the statement of comprehensive income

Answer 6

reports all changes in equity except for shareholder transactions (e.g., issuing stock, repurchasing stock, and paying dividends).

Question 7

Describe the role of the income statement, and what are the 3 elements it is comprised of?

Answer 7

The income statement (also known as the statement of operations or the profit and loss statement) reports on the financial performance of the firm over a period of time.

The elements of the income statement include revenues, expenses, and gains/losses.

*Note: The income statement can be combined with “other comprehensive income” and presented as a single statement of comprehensive income. Alternatively, the income statement and the statement of comprehensive income can be presented separately.

Question 8

Describe the role of the statement of changes in equity

Answer 8

The statement of changes in equity reports the amounts and sources of changes in equity investors’ investment in the firm over a period of time.

Question 9

Describe the statement of cash flows. What are the three classifications of cash flows?

Answer 9

The statement of cash flows reports the company’s cash receipts and payments. These cash flows are classified as follows:

Operating cash flows include the cash effects of transactions that involve the normal business of the firm.
Investing cash flows are those resulting from the acquisition or sale of property, plant, and equipment; of a subsidiary or segment; of securities; and of investments in other firms.
Financing cash flows are those resulting from issuance or retirement of the firm's debt and equity securities and include dividends paid to stockholders.