Reading 16: financial statement roles

Question 1

Which of the following statements least accurately describes a role of financial statement analysis?
Use the information in financial statements to make economic decisions.
Provide reasonable assurance that the financial statements are free of material errors.
Evaluate an entity’s financial position and past performance to form opinions about its future ability to earn profits and generate cash flow.

Answer 1

This statement describes the role of an auditor, rather than the role of an analyst. The other responses describe the role of financial statement analysis. (Module 16.1, LOS 16.a)

Question 2

A firm’s financial position at a specific point in time is reported in the:
balance sheet.
income statement.
cash flow statement.

Answer 2

The balance sheet reports a company’s financial position as of a specific date. The income statement, cash flow statement, and statement of changes in owners’ equity show the company’s performance during a specific period. (Module 16.1, LOS 16.b)

Question 3

Information about accounting estimates, assumptions, and methods chosen for reporting is most likely found in:
the auditor’s opinion.
financial statement notes.
Management’s Discussion and Analysis.

Answer 3

Information about accounting methods and estimates is contained in the footnotes to the financial statements. (Module 16.2, LOS 16.c)

Question 4

If an auditor finds that a company’s financial statements have made a specific exception to applicable accounting principles, she is most likely to issue a:
dissenting opinion.
cautionary note.
qualified opinion.

Answer 4

An auditor will issue a qualified opinion if the financial statements make any exceptions to applicable accounting standards and will explain the effect of these exceptions in the auditor’s report. (Module 16.2, LOS 16.d)

Question 5

Information about elections of members to a company’s Board of Directors is most likely found in:
a 10-Q filing.
a proxy statement.
footnotes to the financial statements.

Answer 5

Proxy statements contain information related to matters that come before shareholders for a vote, such as elections of board members. (Module 16.2, LOS 16.e)

Question 6

Which of these steps is least likely to be a part of the financial statement analysis framework?
State the purpose and context of the analysis.
Determine whether the company’s securities are suitable for the client.
Adjust the financial statement data and compare the company to its industry peers.

Answer 6

Determining the suitability of an investment for a client is not one of the six steps in the financial statement analysis framework. The analyst would only perform this function if he also had an advisory relationship with the client. Stating the objective and processing the data are two of the six steps in the framework. The others are gathering the data, analyzing the data, updating the analysis, and reporting the conclusions. (Module 16.2, LOS 16.f)