Reading 21- Financial Statement Analysis: An Introduction

Question 1

Describe the roles of financial reporting and financial statement analysis.

Answer 1

Financial Reporting= reporting the financial statement information w/0 analysis or opinion.

Financial Statement Analysis= a way to analyze and make sense of the financial reports so that we can make sense of the numbers from financial statement analysis.

Question 2

Describe the roles of the statement of financial position, statement of comprehensive income, statement of changes in equity, and the statement of cash flows in evaluating a company’s performance and financial position.

Answer 2

Statement of Financial Position (Balance Sheet)- is the balance sheet; gives insight to the health of the company

Statement of Comprehensive Income (Income Statement)- is similar to taking a movie for a company; provides information on the increase or decrease in owners’ investments in a company over a period of time.

Statement of Changes in Equity- provides information on the increase or decrease in owners’ investments in a company over a period of time.

Statement of Cash Flows -discloses a company’s sources and uses of cash.

Question 3

Describe the importance of financial statement notes and supplementary information- including disclosures of accounting policies, methods, and estimates- and management’s commentary.

Answer 3

Financial Statement Notes- expert-led notes that will give GAAP led policies for corrections/suggestions to improve business health.

Supplementary Information- footnotes on where the number in the financial statement comes from.

Managements Commentary- companies result of operations and what they interpret as profits/losses; planned future capital expenditures; and future outlook in general.

Question 4

Describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.

Answer 4

Objectives of Audits:

1. ) To obtain reasonable assurance from 3rd party that financial statement representation is REASONABLE.
2. )To report that financial statements are written along the INTERNATIONAL AUDITING STANDARDS.

Types of Audits->
Unqualified Audit Opinion, Qualified Audit Opinion, Adverse Audit Opinion, (Disclaimer of Opinion)

Question 5

Identify and describe information sources that analysts use in financial statements and supplementary information.

Answer 5

Analysts will use not only financial statements, supplementary information, managerial discussions, BUT also quarterly semi-annual reports, company websites, and periodic earnings announcements.

Question 6

Describe the steps in the financial statement analysis framework.

Answer 6

Questions based framework:

1. ) articulate purpose & context of analysis
2. ) input data collection (“find the data”)
3. ) Process data/ analyze data
4. ) make conclusions and recommendations
5. ) Follow-Up