Module 1 Flashcards
what is financial statement analysis
The process of extracting information from financial statements to better understand a company’s current and future performance and financial conditions
who are the different people that have objectives for using financial statements
- management
- investors and analysts
- creditors, lenders, and rating agencies
- regulatory agencies
- legal institutions
- other decision makers
what does management use financial statements for
to raise financing for the company, meet disclosure requirements, and as a benchmark for executive bonuses
what does investors and analysts use financial statements for
to help decide to buy or sell a stock or not
what does creditors and rating agencies use financial statements for
to determine the creditworthiness of a company’s debt and lending terms
what does regulatory agencies use financial statements for
to encourage the enactment of social and economic policies, and to monitor compliance with the laws
what does legal institutions use financial statements for
to assess fines and reparations in litigation
what do other decision makers use financial statements for
for things like determining demands in labour union negotiations and assessing damages for environmental abuses
who are the users that demand financial accounting information
- Managers and employees
- Investment analysts and information intermediaries
- Creditors and suppliers
- Stockholders and directors
- Customers and strategic partners
- Regulators and tax agencies
- Voters and their representatives
who and how are financial information supplied
- If benefits > costs of disclosing accounting information, managers will give out the information
- They can determine the quality and quantity of information to give
- Regulation and bargaining power affects the disclosure costs and benefits
what are the required reports that public companies in the US must file
- form 10-k
- form 10-q
what is the form 10-k
- Audited annual report
- Includes the 4 financial statements with explanatory notes, and the management’s discussion and analysis (MD&A) of financial results
- Must be filed within 60 days of the year-end for larger companies & 90 for smaller companies
what is the form 10-Q
- Unaudited quarterly report
- Includes summary versions of the 4 financial statements and limited additional disclosures
- Must be filed within 40 days of the quarter-end for larger companies & 45 days for smaller companies, except for the 4th quarter, which is in the 10-K
what are other useful information beyond financial statements
- financial statement footnotes
- management discussion and analysis (MD&A)
- independent auditor report
- regulatory filings, including proxy statements (DEF 14A) and other SEC filings (8K)
- prospectus (S1)
- Analyst Research Reports
- ESG reporting
what are financial statement footnotes
Explanation of the numbers in the financial statements
what is an MD&A
What management think about the numbers in the financial statements
what is an independent auditor report
Whether the auditor thinks the statements follows the standards
what is a proxy statement (DEF 14A)
- Filed before shareholder conference
- About important events and structure that shareholders need to approve
- Proposal required to vote
- Details of ownership
- Biographic information on directors
- Disclosure of executive compensation
what is a form 8K
- Important things that shareholders should know
- Wide range of corporate events, reported within 4 days
- Entry into or termination of a material definitive agreement (including petition for bankruptcy)
- Exit from a line of business or impairment of assets
- Change in the company’s certified public accounting firm
- Change in control of the company
- Departure of the company’s executive officers
- Changes in the company’s articles of incorporation or bylaws
what is a prospectus S1
- Needs to be filed when companies sell their shares on the market
- written document that informs potential investors all about the company
what are the benefits of disclosure
- access to capital
- good reputation
- valuation and analysis
- risk assessment
how is access to capital a benefit of disclosure
- capital markets have debt and equity financing
- Lets say the company shares their accounting information
- The better their prospects are, the cheaper it would be for them to get more capital (money)
- This can be from lower interest rates or higher stock prices
how is good reputation a benefit of disclosure
- can also help with recruiting efforts in labour markets -> company looks good = more people want to work there
- can also help with having good supplier-customer relations in the input and output markets
how is valuation and analysis a benefit of disclosure
- How well a company does in these markets depends on their success and if the market knows of that success
- So disclosing audited good news about the company’s products, processes, management, etc. is good for a company, and its why companies would want to do it