Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Financial Reporting and Analysis > R15: Intro to Financial Statement Analysis > Flashcards

R15: Intro to Financial Statement Analysis Flashcards

1
Q

What is the role of financial statement reporting?

A

To provide information about a company’s financial performance, financial position, and changes in financial position.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the role of financial statement analysis?

A

To assess a company’s past performance and evaluate its future potential using financial reports and other relevant company information.

Assessments are performed prior to making an investing decision, offering any credit facilities, or making other economic decisions related to the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

A company’s performance can be examined through…

A

Profitability and Cash Flow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Profitability Definition

A

the ability to generate profits from core business activities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Cash Flow Definition

A

the ability to generate cash receipts in excess of cash payments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

A forecast of the expected amount of future cash flows is important in determining…

A

the company’s ability to meet its obligations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Liquidity

A

a company’s ability to meet its short-term obligations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Solvency

A

a company’s ability to meet its long-term obligations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Companies prepare financial statements to…

A

report their operating performance to investors and creditors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

The income statement is also known as…

A
  • the statement of operations

- profit and loss statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

The income statement provides operating information relating to a company’s business activities…

A

over a period of time (the accounting period)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

The income statement presents..

A

revenues earned by a company and corresponding costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Net Income

A

difference between a company’s total revenue and total costs

Net Income = Revenue - Expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Income statements are useful in evaluating a company’s

A

profitability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Balance sheet is also known as

A

statement of financial position

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

The balance sheet shows

A

a company’s assets, liabilities, and equity at a point in time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

The interrelationships between these three components of the balance sheet are presented in the basic accounting equation:

A

Assets = Liabilities + Owners’ Equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Assets

A

productive resources that a company owns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Liabilities

A

amounts that the company owes other entities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Owner’s Equity

A

shareholders’ residual claim on the company’s assets after deducting liabilities

Owners’ Equity = Assets - Liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

The information contained in balance sheets is used to assess a company’s financial position and to

A

evaluate its ability to meet short-term and long-term obligations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

A cash flow statement reports..

A

various sources of cash receipts and cash payments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

The cash flow statement segments the sources and uses of cash into the following activities

A

operating, investing, and financing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Operating activities

A

day-to-day core business activities of a company.

25
Q

Investing activities

A

the acquisition or disposal of long-term assets.

26
Q

Financing activities

A

the injection or repayment of capital

27
Q

Cash flow statements reflect

A

a company’s ability to generate cash from its core business activities

28
Q

It is desirable that a company generates most of its cash from..

A

operating activities, as opposed to investing and financing activities.

29
Q

Statement of Changes in Owners’ Equity

A

reports any changes in owners’ investment in the business. It is useful in understanding changes in the financial position of a company.

30
Q

Financial notes are an important part of financial statements because

A

they provide detailed explanatory information

31
Q

Areas of financial notes

A
  • Accounting policies, methods, and estimates
  • Business acquisitions and disposals
  • Commitments and contingencies
  • Legal proceedings
  • Subsequent events
  • Related-party transactions
  • Business and geographic segments
  • Financial instruments and risks arising from them
32
Q

Footnotes contain important details about

A

accounting methods, estimates, and assumptions

that have been used by the company in preparing its financial statements.

33
Q

Are footnotes audited?

A

YES

34
Q

Is MD&A required under GAAP?

A

YES

35
Q

The management discussion and analysis section highlights..

A
  • important trends and events that affect a company’s liquidity, capital resources, and operations.
  • prospects for the upcoming year with respect to inflation, future goals, material events, and uncertainties.
36
Q

Is the MD&A section audited?

A

NO

37
Q

Typically according to IFRS what should be included in the MD&A?

A
  • The nature of the business
  • Management objectives and strategies
  • The company’s significant resources, risks, and relationships
  • Results of operations
  • Critical performance measures
38
Q

Financial statements in a company’s annual report must be…

A

audited

They must be examined by an independent accounting firm (or audit practitioner), which then states its opinion on the financial statements.

Audits are required by contractual arrangement, law, or regulation.

39
Q

Objective of audits

A
  • 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 material respects, in accordance with an applicable financial reporting framework; and
  • To report on the financial statements, and communicate as required by the ISAs (international standards for auditing), in accordance with the auditor’s findings.
40
Q

Types of auditor’s opinions:

A

Unqualified
Qualified
Adverse
Disclaimer

41
Q

Unqualified Opinion

A

the financial statements have been presented fairly in accordance with applicable accounting standards.

42
Q

Qualified Opinion

A

the financial statements have been presented fairly, but do contain exception(s) to the accounting standards.

The audit report provides further details and explanations relating to the exception(s)

43
Q

Adverse Opinion

A

that the financial statements have not been presented fairly and significantly deviate from acceptable accounting standards.

44
Q

Disclaimer of Opinion

A

issued when the auditor, for whatever reason, is not able to issue an opinion on the financial statements.

45
Q

Internal controls definition

A

seeks to ensure the reliability of processes used by the company in preparing its financial statements.

46
Q

In the United States, management is responsible for

A
  • the effectiveness of internal control
  • to evaluate the effectiveness of internal control
  • to support the evaluation
  • to provide a report on internal control
47
Q

Interim Reports

A

prepared either semiannually or quarterly.

contain the four financial statements and footnotes, but are not audited.

48
Q

Proxy statements are distributed to shareholders when

A

there are matters that require a shareholder vote.

49
Q

Proxy statements provide info on

A
  • management and director compensation
  • company stock performance
  • potential conflicts of interest between management, the board of directors, and shareholders.
50
Q

Press releases, in addition to a company’s website and conference calls, provide

A

current information about the company.

51
Q

External sources provide information about

A
  • the economy, the industry that the company operates in, and the company’s competitors.
  • Such information is useful as it allows the analyst to place the company’s performance in perspective.
  • Examples of external sources include trade journals and government agencies.
52
Q

of steps in the financial analysis framework?

A

6

53
Q

Step 1 in financial analysis framework

A

Define the purpose and context of the analysis

In cases where the task is well-defined, the purpose is governed by institutional norms. However, there are also analytical tasks that require the analyst’s discretion in defining the purpose. The definition of the purpose determines the approach, tools, data sources, and the format used to present results. In this preliminary stage, the analyst is also required to define the context of the analysis, which requires understanding the audience, the time frame, and the resources available for completion of the tas

54
Q

Step 2 in financial analysis framework

A

Collect data

The analyst acquires the necessary information to answer the questions that were defined in the previous stage. For instance, a task with the purpose of analyzing the historical performance of a company could be carried out by understanding the financial statements alone. However, a more thorough analysis that requires understanding a company’s financial performance and position relative to the industry would require collecting industry data as well.

55
Q

Step 3 in financial analysis framework

A

Process data

The financial information collected is converted into ratios, growth rates, common-size financial statements, charts, and regressions.

56
Q

Step 4 in financial analysis framework

A

Analyze/interpret the processed data

The data is interpreted and a recommendation is reached.

57
Q

Step 5 in financial analysis framework

A

Develop and communicate conclusions

An appropriate format for the presentation of analysis is determined. The presentation format is sometimes determined by regulatory authorities or professional standards.

58
Q

Step 6 in financial analysis framework

A

Follow up

Financial statement analysis does not end with the preparation of a recommendation report. When equity analysis is performed or a credit rating is assigned, periodic reviews are required to determine whether previously drawn conclusions remain valid.

Financial Reporting and Analysis (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions