LM 1: Introduction To Financial Statement Analysis Flashcards
What are the 6 steps to the financial statement analysis framework? ACPADF
- Articulate the purpose and context of the analysis
- Collect data
- Process data
- Analyze/ interpret data
- Develop & communicate conclusions & recommendations
- Follow up
What is the process of articulating the purpose and context of the analysis in the financial statement analysis framework?
Getting the approach, tools, data, sources, and format in which final report will be made
What is data collection in the financial statement analysis framework?
Gathering the necessary data to answer the specific questions compiled in the articulating purpose and context of the analysis step.
What is processing data in the financial statement analysis framework?
Processed data that was collected, compute financial ratios
What is analyzing the processed data in the financial statement analysis framework?
Analyze the processed data, interpret the output of the analysis, use it to support a conclusion or recommendation
What is developing and communicating conclusions & recommendations in the financial statement analysis framework?
The analyst gives feedback on conclusion & recommendation derived from analysis in an appropriate format
What is follow up in the financial statement analysis framework?
Periodic reviews to determine if the initial conclusions and recommendations still hold true.
What does the international organization of securities commissions do?
Regulate a significant part of the world’s financial markets through established objectives and principles of securities regulation.
What are IOSCO 3 core objectives? PRE
- Protect investors
- Reduce systematic risk (whole market risk)
- Ensuring that markets are fair, efficient, & transparent
What are IOSCO’s 2 principles of financial reporting? SH
- should be full, accurate, and timely disclosure of financial results.
- highly and internationally acceptable quality.
What entity is the US SEC a member of, and what is the US SEC’s responsibility?
US SEC is a member of IOSCO, it’s responsibility is to regulated the securities and capital markets in the US
What is the Sarbanes-Oxley Act of 2002?
act to improve auditing and public disclosure in response to several accounting scandals in the early 2000s.
How does each member of the European Union regulate capital markets?
each member of EU regulates its own capital markets
Why are notes to the financial statements essential and what do they tell us?
- notes are essential for understanding financial statements
- disclose accounting policies, methods, and estimating procedures
What is an operating segment?
It’s a business division or a different geographic segment within a company that requires reporting.
eg. Apple has segments for the location they do business in; America, Europe, Japan, etc.
What is management commentary or management discussion and analysis (MD&A)?
where management discusses the nature of the business, past results, and future outlook.
In a management commentary what 5 elements does IASB recommend be included? NMCRC
- Nature of business
- Management’s objectives and strategies
- Company’s significant resources, risks, and relationships
- Results of operations
- Critical performance measures
In a management discussion & analysis what 4 things does SEC require to be discussed? AIOC
- Any favorable and unfavorable trends
- Information about the effects of inflation, changing prices, or other material events
- Off-balance-sheet obligations and contractual commitments
- Critical accounting policies
What type of audit is required for publicity traded companies?
Independent audit
Why are independent audits important?
Provide assurance financial statements fairly represent a companies financial position, performance, cash flows, and internal control systems.
What government act requires auditors to express opinion on company’s internal control systems?
Sarbanes Oxley Act
What is the auditors report?
The auditor provides a written opinion on the financial statements and internal control systems
What are the 4 types of audit reports? UQAD
-unqualified audit opinion
-qualified audit opinion
-adverse audit opinion
-disclaimer of opinion
What is an unqualified audit opinion?
Used to indicate financial statements fairly presented and in accordance with accounting standards
What is a qualified audit opinion?
Expressed when there is some amount of limitation to the scope of audit or when there is an exception to the accounting standards
What is an adverse audit opinion?
Expressed when the financial statements materially depart from accounting standards and not fairly presented.
What is a disclaimer of opinion?
Indicates that auditor is unable to issue audit opinion for one reason or another
Is IFRS rules-based or principal-based?
Principal based.
Is US GAAP principal-based or rules-based?
Rules based.
What are 4 other information sources analysts should use besides annual financial statements and supplementary information, describe them? IPPP
- Issuer Sources (information directly from the company)
- Public third-party sources (general news, economic indicators by government)
- Proprietary third-party sources (Bloomberg, reports from sell-side analysts)
- Proprietary primary research (research done directly by the analyst)
What is the difference between standard setting bodies and regulatory authorities?
Standard setting bodies set the rules while regulatory authorities enforce the standards
