LM 1: Introduction To Financial Statement Analysis

Question 1

What are the 6 steps to the financial statement analysis framework? ACPADF

Answer 1

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

Question 2

What is the process of articulating the purpose and context of the analysis in the financial statement analysis framework?

Answer 2

Getting the approach, tools, data, sources, and format in which final report will be made

Question 3

What is data collection in the financial statement analysis framework?

Answer 3

Gathering the necessary data to answer the specific questions compiled in the articulating purpose and context of the analysis step.

Question 4

What is processing data in the financial statement analysis framework?

Answer 4

Processed data that was collected, compute financial ratios

Question 5

What is analyzing the processed data in the financial statement analysis framework?

Answer 5

Analyze the processed data, interpret the output of the analysis, use it to support a conclusion or recommendation

Question 6

What is developing and communicating conclusions & recommendations in the financial statement analysis framework?

Answer 6

The analyst gives feedback on conclusion & recommendation derived from analysis in an appropriate format

Question 7

What is follow up in the financial statement analysis framework?

Answer 7

Periodic reviews to determine if the initial conclusions and recommendations still hold true.

Question 8

What does the international organization of securities commissions do?

Answer 8

Regulate a significant part of the world’s financial markets through established objectives and principles of securities regulation.

Question 9

What are IOSCO 3 core objectives? PRE

Answer 9

1. Protect investors
2. Reduce systematic risk (whole market risk)
3. Ensuring that markets are fair, efficient, & transparent

Question 10

What are IOSCO’s 2 principles of financial reporting? SH

Answer 10

1. should be full, accurate, and timely disclosure of financial results.
2. highly and internationally acceptable quality.

Question 11

What entity is the US SEC a member of, and what is the US SEC’s responsibility?

Answer 11

US SEC is a member of IOSCO, it’s responsibility is to regulated the securities and capital markets in the US

Question 12

What is the Sarbanes-Oxley Act of 2002?

Answer 12

act to improve auditing and public disclosure in response to several accounting scandals in the early 2000s.

Question 13

How does each member of the European Union regulate capital markets?

Answer 13

each member of EU regulates its own capital markets

Question 14

Why are notes to the financial statements essential and what do they tell us?

Answer 14

• notes are essential for understanding financial statements
• disclose accounting policies, methods, and estimating procedures

Question 15

What is an operating segment?

Answer 15

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.

Question 16

What is management commentary or management discussion and analysis (MD&A)?

Answer 16

where management discusses the nature of the business, past results, and future outlook.

Question 17

In a management commentary what 5 elements does IASB recommend be included? NMCRC

Answer 17

1. Nature of business
2. Management’s objectives and strategies
3. Company’s significant resources, risks, and relationships
4. Results of operations
5. Critical performance measures

Question 18

In a management discussion & analysis what 4 things does SEC require to be discussed? AIOC

Answer 18

1. Any favorable and unfavorable trends
2. Information about the effects of inflation, changing prices, or other material events
3. Off-balance-sheet obligations and contractual commitments
4. Critical accounting policies

Question 19

What type of audit is required for publicity traded companies?

Answer 19

Independent audit

Question 20

Why are independent audits important?

Answer 20

Provide assurance financial statements fairly represent a companies financial position, performance, cash flows, and internal control systems.

Question 21

What government act requires auditors to express opinion on company’s internal control systems?

Answer 21

Sarbanes Oxley Act

Question 22

What is the auditors report?

Answer 22

The auditor provides a written opinion on the financial statements and internal control systems

Question 23

What are the 4 types of audit reports? UQAD

Answer 23

-unqualified audit opinion
-qualified audit opinion
-adverse audit opinion
-disclaimer of opinion

Question 24

What is an unqualified audit opinion?

Answer 24

Used to indicate financial statements fairly presented and in accordance with accounting standards

Question 25

What is a qualified audit opinion?

Answer 25

Expressed when there is some amount of limitation to the scope of audit or when there is an exception to the accounting standards

Question 26

What is an adverse audit opinion?

Answer 26

Expressed when the financial statements materially depart from accounting standards and not fairly presented.

Question 27

What is a disclaimer of opinion?

Answer 27

Indicates that auditor is unable to issue audit opinion for one reason or another

Question 28

Is IFRS rules-based or principal-based?

Answer 28

Principal based.

Question 29

Is US GAAP principal-based or rules-based?

Answer 29

Rules based.

Question 30

What are 4 other information sources analysts should use besides annual financial statements and supplementary information, describe them? IPPP

Answer 30

1. Issuer Sources (information directly from the company)
2. Public third-party sources (general news, economic indicators by government)
3. Proprietary third-party sources (Bloomberg, reports from sell-side analysts)
4. Proprietary primary research (research done directly by the analyst)

Question 31

What is the difference between standard setting bodies and regulatory authorities?

Answer 31

Standard setting bodies set the rules while regulatory authorities enforce the standards