Reading 16 Flashcards
What is the purpose of financial reporting?
Present company financial performance via financial statement analysis to investors, creditors, interested parties
What is the purpose of Financial Statement Analysis?
Mgt
1)
2)
Analyst
3)
Use information in financial statement + other relevant information to make economic decisions.
For management, it involves:
1) Whether to invest in company’s securities/recommend to investors
2) Whether to extend Trade or Credit to firm
Analyst
3) Gather data to form opinion on firm’s past performance and current financial position to determine their ability to earn profit and generate cash flow in future
What is the purpose of the Balance Sheet?
What 3 elements does it consist of?
Purpose is to show the firm’s current financial position at point in time.
3 Elements:
a. Assets
b. Liabilities
C. Owner’s/Shareholders equity:
Assets - Resources Controlled by Firm
Liabilities - Amount owed to creditors/lenders
Equity - Residual Interest in the net assets of an entity remaining after deducting liabilities from Assets
A = L + E
What is Capital Structure?
Proportion of liabilities and equity used to finance the company
What is the role of the statement of comprehensive income?
Reports all changes in equity except for shareholder transactions
Examples of Shareholder transactions:
a. Issuing Stock
b. Repurchasing stock
c. Dividend Payout
What is the role of the income statement?
Reports on financial performance of firm over a time period, using revenue, expenses, and gains and losses.
Revenue = Inflow
Expense = Outflow
Other Income = Inflow Gains may/may not arise due to ordinary course of business (e.g investments, currency value changes etc)
What is the role of the statement of changes in equity?
Reports amounts and sources of changes in equity investors’ investment in the firm over a time period.
What is the role of the statement of cash flows?
Reports the company’s cash receipt and payments.
a. Operating: cash effects of transaction pertaining to business operations
b. Investing: cash flows resulting from acquisition/sale of PPE, or of subsidiary or segment; securities; or investments in firm
c. Financing: cash flows resulting from issuance or retirement of debt and equity securities, and include dividend payouts to shareholders.
What are Financial Statement Notes?
Include disclosures that provide further details about information summarised in financial statements.
It allows users to improve their assessment of the amount, timing, and uncertainty of estimates in financial statements.
What are the 3 objectives of footnotes?
1) Discusses basis of presentation such as fiscal periods covered, inclusion of consolidated entities
2) Provides information on accounting methods, assumptions, management estimates.
3) Provides additional information on line items such as business acquisitions/disposals, legal actions, employee benefit plans, contingencies and commitment, customer breakdown, sales to related parties and segments of the firm.
What is discussed in the Management’s Discussion and Analysis (MD&A) section?
for SEC, MD&A must discuss:
a. trends and significant events and uncertainty which will affect firm’s liquidity, capital resources, and results of operations
b. effects of inflation and changing prices if material
c. Impacts of off-balance sheet obligation and contractual obligations such as purchase commitments
d. accounting policies that require significant management judgement
e. Forward-looking expenditure and divestitures
What is discussed in the Management’s Discussion and Analysis (MD&A) section?
for SEC, MD&A must discuss:
a. trends and significant events and uncertainty which will affect firm’s liquidity, capital resources, and results of operations
b. effects of inflation and changing prices if material
c. Impacts of off-balance sheet obligation and contractual obligations such as purchase commitments
d. accounting policies that require significant management judgement
e. Forward-looking expenditure and divestitures
What is an audit and the objective of it?
An audit is an independent review of an entity’s financial statements.
The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of financial statements.
What the different types of auditor opinions?
Unqualified Opinion - Auditor believes statements are free from material omission and errors.
Qualified Opinion - Auditor believes some statements make exceptions to accounting principles
Adverse opinion - Auditor believes statements are not presented fairly or are materially nonconforming with accounting standards.
Disclaimer of opinion - Auditor is unable to express an opinion.
*Note: Auditor MUST express an opinion on firm’s internal controls for publicly listed companies
What are internal controls?
Internal controls are processes by which company ensures it presents accurate financial statements.
For publicly listed. companies, auditor MUST express an opinion
