Introduction

Question 1

What are the six steps of the financial statement analysis framework?

Answer 1

1. Articulate purpose and context of analysis.
2. Collect data
3. Process data
4. Analyze / interpret data
5. Develop / communicate conclusions and recommendations.
6. Follow-up

Question 2

What is the accounting standard for multinationals?

Answer 2

US GAAP
Generally Accepted Accounting Principles

Question 3

What is IOSCO?

Answer 3

International Organization of Securities Commissions, who regulate 95% of markets.

Question 4

What are the three important goals of IOSCO’s Objectives and Principles of Securities Regulations?

Answer 4

Protecting investors
Ensuring fair, efficient and transparent markets
Reducing systemic risk

Question 5

Who is the SEC?

Answer 5

Securities and Exchange Commission.
The regulatory authority in the US is primarily responsible for securities and capital markets regulation. It is also an ordinary member of IOSCO.

Question 6

What are the most important SEC Filings for firms?

Answer 6

1. Securities Offerings Registration Statement
2. Forms 10-K, 20-F, and 40-F
3. Annual Report
4. Proxy Statement / Form DEF-14A
5. Forms 10-Q and 6-K

Question 7

What is the Securities Offerings Registration Statement?

Answer 7

The 1933 Act requires companies offering securities to file a registration statement. They include disclosures about the securities being offered for sale, the relationship of these new securities to the issuer’s other capital securities, the information typically provided in the annual filings, recent audited financial statements, and risk factors involved in the business.

Question 8

What are the Forms 10-K, 20-F and 40-F?

Answer 8

Companies are required to file these forms annually. Form 10-K is for US registrants, Form 40-F is for certain Canadian registrants, Form 20-F is for all other non-US registrants. These forms require a comprehensive overview, including information concerning a company’s business, risk factors, financial disclosures, legal proceedings, and information related to management.

Question 9

What is the difference between a 10-K and an annual report?

Answer 9

A 10-K is a SEC annual filing, while most companies also prepare an annual report to shareholders. This is not a requirement of the SEC!

Question 10

What is a Proxy Statement / Form DEF-14A?

Answer 10

The SEC requires that shareholders of a company receive a proxy statement before a shareholder meeting.

Question 11

What is a proxy?

Answer 11

A proxy is an authorization from the shareholder giving another party the right to cast its vote.

Question 12

Shareholder meetings are held at least once a year, but any special meetings also require a proxy statement.

Question 13

What are the Forms 10-Q and 6-K?

Answer 13

Companies are required to submit these forms for interim periods. Quarterly for US companies on Form 10-Q and semiannually for many non-US companies on Form 6-K.

Question 14

What is a Form 8-K?

Answer 14

In addition to filing annual and interim reports, SEC registrants must report material corporate events on a more current basis. Form 8-K is the “current” report companies must file with the SEC to announce such major events as acquisitions or disposals of corporate assets, changes in securities and trading markets, matters related to accountants and financial statements, corporate governance and management changes, and Regulation FD disclosures.

Question 15

What are Forms 3, 4, 5, and 144?

Answer 15

Form 3, 4, and 5 are required to report beneficial ownership of securities. These filings are required for any director or officer of a registered company as well as beneficial owners of greater than 10 percent of a class of registered equity securities. Form 3 is the initial statement, Form 4 reports changes, and Form 5 is the annual report. Form 144 is notice of the proposed sale of restricted securities or securities held by an affiliate of the issuer.

Question 16

What is Form 11-K?

Answer 16

This is the annual report of employee stock purchase, savings and similar plans. It might be of interest to analysts for companies with significant employee benefit plans because it contains more information about these plans than disclosed in the company’s financial statements.

Question 17

Which accounting standards do EU countries use?

Answer 17

International Financial Reporting Standards (IFRS)

Question 18

Who are the two bodies established by the European Commission to regulate securities?

Answer 18

European Securities Committee (ESC) and European Securities and Market Authority (ESMA)

Question 19

What are financial notes?

Answer 19

The notes provide information that is essential to understanding the information provided in the statements.

Question 20

What is an operating segment and what do companies have to disclose about them?

Answer 20

An operating segment is defined as a component of a company that engages in activities that may generate revenue and create expenses, whose results are regularly reviewed by the company’s senior management and for which discrete financial information is available. A firm is required to provide some information under both IFRS and US GAAP in the notes to financial statements by operating segment.

Question 21

When must a company disclose information about any operating segment?

Answer 21

When the segment constitutes of 10 percent or more of the combined operating segments’ revenue, assets or profit.

Question 22

When must a company disclose on single customers?

Answer 22

If any single customer represents 10 percent or more of the company’s total revenues, the company must disclose that fact, though not the identity of that customer.

Question 23

What are other words for the section of a 10-K where management discusses a variety of issues, including the nature of the business, past results, and outlook?

Answer 23

Management report
Management commentary
Operating and financial review
MD&A

Question 24

What are five important elements of the management commentary?

Answer 24

Nature of the business
Management’s objectives and strategies
Company’s significant resources, risks and relationships
Results of operations
Critical performance measures

Question 25

What is an audit report?

Answer 25

Financial statements presented in annual reports are generally required to be audited by an independent accounting firm in accordance with specified auditing standards. Their opinion is called an audit report.

Question 26

What are the overall objectives of an auditor in conducting an audit of financial statements?

Answer 26

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all materials respects, in accordance with an applicable financial reporting framework. To report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings.

Question 27

An auditor can provide reasonable assurance but never absolute assurance.

Question 28

What is an unqualified audit opinion?

Answer 28

It states that the financial statements give a “true and fair view” (international) or are “fairly presented” (international and United States) in accordance with applicable accounting standards. Equal to an “unmodified” or “clean” opinion. This is the one we want to see in reports!

Question 29

What is a qualified audit opinion?

Answer 29

An audit opinion where there is some scope limitation or exception to accounting standards.

Question 30

What is an adverse audit opinion?

Answer 30

Issued when an auditor determines that the financial statements materially depart from accounting standards and are not fairly presented.

Question 31

What is a disclaimer of opinion?

Answer 31

It occurs when, for some reason, such as a scope limitation, the auditors are unable to issue an opinion.

Question 32

Audit report includes a discussion of Key Audit Matters (International) or Critical Audit Matters (US).

Question 33

Which accounting standards have most countries adopted outside the US?

Answer 33

IFRS, US GAAP in the US

Question 34

Are there differences between US GAAP and IFRS?

Answer 34

Yes.
Rules vs principles
Operating activities VS Operating activities or Financing activities
FIFO, LIFO, Weighted Average VS FIFO, Weighted Average
Development Cost as an expense VS Capitalization

Question 35

What are other sources of information that analysts can use outside of regulated information from issuers?

Answer 35

Issuer sources (earnings calls, presentations, events, press releases, speaking with management)
Public third-party (industry whitepapers, news, social media)
Proprietary primary research (reports such as Bloomberg)

Question 36

Which organizations are responsible for the US GAAP and IFRS?

Answer 36

US GAAP = FASB
IFRS = IASB