FRA (I): 15 & 16 Flashcards
Refers to the way companies show their financial performance to all interested parties (investors, creditors, suppliers, etc.) by preparing and presenting financial statements
Financial reporting
What are the 3 objectives of financial statement analysis?
1) Evaluate a company to make economic decisions
Using information in a company’s financial statements, along with other relevant information to make economic decisions
Whether to invest
Recommend to investors
Extend trade
Extend bank credit
2) Evaluate past performance and current financial position
3) Form opinions about a firm’s ability to earn profit and generate cash flow in the future
reports the firm’s financial position at a point in time
Statement of financial position (Balance sheet):
What components make up the balance sheet?
1) Assets= liabilities + owner’s equity
the residual interest in the net assets of an entity that remains after deducting its liabilities from its asset
Owner’s equity (shareholder’s equity, shareholder’s funds, net assets, etc.):
Owner’s equity= ?
= owners’ investment + retained earnings
shows the results of a firm’s business activities over the period
Statement of comprehensive income:
Statement of comprehensive income shows all changes in equity, except for ________?
Shareholder’s transactions: share issues, stock buybacks, dividends
reports the financial performance of the firms over a period of time
Statement of operations or profit and loss statement (Income statement)
The income statement is made up of?
Net income= Revenues - Expenses
and other income (gains and losses)
the income statement is _____ based, using the ____ principle
accrual; matching
reports the amounts and sources of changes in equity investors investment in the firm over a period of time
Statement of changes in equity
stock at par
additional paid in capital
issuance and repurchases
changes in RE
other comprehensive income
dividends
statement of stockholder’s equity
include disclosures that provide further details about the information summarized in the financial statements
financial statement notes (footnotes)
Explain the importance of footnotes
allows users to improve their assessments of the amount, timing, and uncertainty of the estimates in the financial statements
Provides additional info on items like:
business acquisitions or disposals
legal actions
employee benefit plans
contingencies and commitments
significant customers
sales to related parties
segments of the firm
financial statement footnotes
Discusses the basis of presentation such as the fiscal period covered by the statements and the inclusion of consolidated entities
financial statement footnotes
addresses:
Company’s key relationships, resources, and risks (recommended by IFRS)
Nature of the business
Management’s objectives
Company’s past performance
The performance measures
significant trends, events, and uncertainties that affect operating results
Managements commentary/ Management Discussion and analysis (MD&A)
objectives of audits: enable the auditor to provide an opinion on the _____ and ______ of the financial statements
fairness; reliability
a clean/unqualified audit opinion means the auditor believes the statements are:
free from material omissions and errors
Qualified opinion: if the statements make ______ to the accounting principles
any exceptions
Adverse opinion: if the statements are ______ or are materially _____ with accounting standards
not presented fairly; non-conforming
Disclaimer opinion: if the auditor is _______ express an opinion
unable to
Effective internal controls ensure the ______, and are the responsibility of _______
accuracy of the financial statements; management
processes by which the company ensures that it presents accurate financial statements
internal controls
Issued to shareholders when there are matters that require a shareholder vote
Proxy statements
quarterly and semiannual, unaudited reports
SEC filings
Interim SEC fillings typically update the major financial statements & footnotes
written by management and often viewed as public relations or sales material
corporate reports/ press releases
firms often provide this before financial statements are released, where senior management is able to answer questions on a conference call
earnings guidance
Financial statement analysis framework:
1. State the ______
2. Gather _____
3. Process _____
4. _____ and ____ data
5. ____ conclusions or recommendations
6. ____ analysis
- State the objective and context. Determine what questions the analysis is meant to answer, the form in which it needs to be presented, and what resources and how much time are available to perform the analysis.
- Gather data. Acquire the company’s financial statements and other relevant data on its industry and the economy. Ask questions of the company’s management, suppliers, and customers, and visit company sites.
- Process the data. Make any appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets.
- Analyze and interpret the data. Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports.
- Report the conclusions or recommendations. Prepare a report and communicate it to its intended audience. Be sure the report and its dissemination comply with the Code and Standards that relate to investment analysis and recommendations. Discussion & presentation of inherent risks
- Update the analysis. Repeat these steps periodically and change the conclusions or recommendations when necessary.
An audit provides _____ ______ that the financial statements are fairly presented
reasonable assurance
the preferred audit opinion is the _____
unqualified/clean
The following (increase/decrease) the ______
-New equity issuance ____
-cash dividends _____
-share repurchase____
paid in capital account (owner’s investment)
* + new equity issuance
* - cash dividends
* - share repurchase
For a company issuing securities, in the US, to meet it’s obligations with Sarbanes Oxley act, management is required to attest to?
the adequacy of internal control over financial reporting
The footnotes reveal ?
information about accounting methods, estimates, and assumptions
According to IASB, what is the difference in financial reporting and the objective of financial statements?
Using the information in a company’s financial statements to make economic decisions is financial analysis, not financial reporting.
Role of financial statement analysis:
To form ______ about a company’s future _____ and financial _____
expectations
performance
position
Owner’s equity=
paid in capital + retained earnings
Provide information about the firm, to current and potential investors & lenders:
Role of Financial Statement Reporting
What is the importance of the conceptual framework for financial reporting?
provide consistency, by narrowing the range of acceptable financial reports
private sector, professional organizations of accountants and auditors that establish financial reporting standards
standard setting bodies
For standard setting bodies to have authority, they must be ____?
recognized by regulatory authorities
what are the two primary standard setting bodies and what do they each set?
FASB sets GAAP
IASB sets IFRS
government agencies that have the legal authority to enforce compliance with financial reporting standards
regulatory authorities
What regulatory authority does the US use? And what does it oversee?
SEC oversees the public companies accounting oversight board
The SEC enforces ______?
Sarbanes Oxley
Many national ______ belong to the International Organization of Securities Commissions (IOSCO)
regulatory authorities
The objective of the IOSCO is to ensure markets are ____?
fair, efficient, transparent
IOSCO Role: promoting cross-border ______ and _____ in securities regulation
cooperation; uniformity
The conceptual framework for financial reporting details _______ and specifies ______?
qualitative characteristics of financial statements;
specifies the required reporting elements
The objective of the conceptual framework for financial reporting: provide financial information that is useful in making decisions about ______? Based on ______ , ______, _______ of the firm?
providing resources to an entity
financial position
financial performance
cash flows
What are the two qualitative characteristics of the conceptual framework for financial reporting?
relevance;
faithful representation
Financial statements are ______ if information can influence user’s economic decisions or affect evaluations of past events or forecast of future events
relevance (qualitative characteristic)
Financial statements have faithful representation if information is …..?
complete
neutral
free from error
What are the 4 enhancing characteristics for the qualitative characteristics of the conceptual framework?
comparability
verifiability
timeliness
understandability
What are the required reporting elements for IASB conceptual framework?
assets
liabilities
equity
income
expense
Resources controlled as a result of past transactions that are expected to provide future economic benefits
assets
Obligations as a result of past events that are expected to require an outflow of economic resources
liabilities
The owners’ residual interest in the assets after deducting the liabilities
equity
An increase in economic benefits
Enhancement of assets
Decrease of liabilities
Revenue and gains
income
Decreases in economic benefits
Outflow/depletion of assets
Increase in liabilities
Expenses and losses
expenses
Balance sheet measures ____?
a company’s financial position
Income statement measures____?
a company’s financial performance
When recognizing reporting elements, what two parameters are necessary?
- probable flows of benefit
- items value can be measured reliably
Items should be recognized in its financial statement element if a future economic benefit from the item is probable
probable flows of benefit
the amount originally paid for the asset
historical cost
Advantage of using: objective & verifiable
Disadvantage: may not represent economic value, especially in inflationary enviornment
the amount the firm would have to pay today for the sam asset
current cost
the estimated selling price of the asset in the normal course of business minus the selling cost
* Amount received in an orderly disposal
net realizable value
discounted value of the asset’s expected future cash flows
present value
the price at which the asset can be sold, or liability transferred in an orderly transaction between willing parties
fair value
What are the two constraints of financial statement preparation?
benefit of info > cost of presenting info
non-quantifiable info (company reputation)
What are the two assumptions of financial statements?
accrual basis
going concern
Accrual basis: that the financial statements should reflect transactions when ______ , not when _____
they actually occur;
cash is paid
Distinguishes between short term and long term components
going concern
What are the required financial statements under IFRS (IASB)?
- Balance sheet
- Statement of comprehensive income
- Cash flow statement
- Statements of changes in owner’s equity
- Explanatory notes (including a summary of accounting policies)
The following are ….?
fair representation
going concern basis
accrual basis of accounting
consistency
materiality
features/fundamental principles of the required financial statements
The following are…?
aggregation where appropriate
no offsetting
reporting frequency
comparative info
classified balance sheet
specific minimum info
Presentation requirements of financial statements:
Reporting frequency of financial statements must be ____?
annually
A classified balance sheet shows?
current and noncurrent liabilities
To evaluate the potential effect of an innovative and unique type of business transaction on financial statements, an analyst should gain an understanding of the transactions ______?
economic purpose
SEC filings are available from:
EDGAR:
Companies’ annual and quarterly financial statements are also filed with the SEC (Form 10-K and Form 10-Q, respectively)
Auditors are appointed by:
audit committee of the BOD
Aims to develop accounting standards based on principles in an attempt to achieve consistency in financial reporting approaches and judgments while trying to limit the range of acceptable answers
The joint conceptual framework project of IASB & FASB
