Section A - Financial Statement Analysis Flashcards
What are the basic financial statements?
Income statement, Balance sheet, statement of changes in equity position/stockholder’s equity, and statement of cash flows
What are financial statements use for?
Financial statements are used by variety of users with an economic interest. It provides financial information for decision-making. By Investopedia, it provides a snapshot of a corporation’s financial health at a particular point in time, giving insight into its performance, operations, cash flow and overall conditions.
What is the income statement used for?
It informs the reader about the ability of a business to generate a profit. In addition, it reveals the volume of sales, and the nature of the various types of expenses, depending upon how expense information is aggregated. When reviewed over multiple time periods, the income statement can also be used to analyze trends in the results of company operations. (Accounting Tools)
The income statement reports the revenue generated from sales, the operating expenses involved in creating that revenue as well as other costs, such as taxes and interest expense on any debt on the balance sheet. The net amount or the bottom line of the income statement is the net income or the profit for the period. Net income is revenue minus all of the costs of doing business. (investopedia)
What is the purpose of the balance sheet?
This is to inform the reader about the current status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for a number of liquidity ratios. (Acctg Tools)
The balance sheet shows a company’s assets (what they own), liabilities (what they owe), and stockholders’ equity (or ownership) at a given moment (Investopedia)
What is the purpose of the statement of cash flows?
It is to show the nature of cash receipts and cash disbursements, by a variety of categories. This information is of considerable use, since cash flows do not always match the sales and expenses shown in the income statement. (Acctg Tools)
Cash flow is important because it shows how much cash is available to meet short-term obligations, invest in the company, or pay dividends to shareholders. (Investopedia)
What are the types of financial statement users?
Direct users, indirect users, internal and external users
Who are the direct users?
Investors and owners, management, suppliers, employees, creditors and customers
Who are the indirect users?
Regulatory agencies, stock markets, financial analysts
Who are the internal users?
Management, company, boards of directors, employees
Who are the external users?
Investors, suppliers, customers, regulatory agencies, financial analystsm stock exchange
What is the cash flow statement composed of?
Operating (O), Investing (I) and Financing (F) activities
What is the common size (Vertical) analysis?
It allows the user to compare financial statements from different time periods to analyze trends and review the organization’s future growth prospects.
Common size balance sheets show numeric values and their relative percentages for total assets, liabilities, and equity accounts.
This form of balance sheet is not required for generally accepted accounting principles (GAAP) reporting.
It displays items as a percentage of a common base figure, total sales revenue. It lets analysts compare companies of different sizes, in different industries or across time in an apples-to-apples way.
What is the financial ratio analysis?
Financial ratio analysis involves the evaluation of line items in financial statements to compare the results to previous periods and competitors.
Financial ratios help investors break down the enormous amount of financial data that are reported by companies.
Financial ratio analysis analyzes specific financial line-items within a company’s financial statements to provide insight as to how well the company is performing. Ratios determine profitability, a company’s indebtedness, the effectiveness of management, and operational efficiency.
What is the horizontal/trend analysis?
It is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods.
Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.
Key takeaways of horizontal analysis
Horizontal analysis is used in the review of a company’s financial statements over multiple periods.
It is usually depicted as percentage growth over the same line item in the base year.
Horizontal analysis allows financial statement users to easily spot trends and growth patterns.
Horizontal analysis shows a company’s growth and financial position versus competitors.
Horizontal analysis can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison.
