Week 6 - Financial Statement Analysis

Question 1

How many financial statements are there?

Answer 1

4

Question 2

What are the main financial statements?

Answer 2

1) Statement of Financial Position
2) Income Statement
3) Statement of Cash Flows
4) Statement of Changes in Equity

Question 3

What do users of Financial Statements want to know?

Answer 3

1) Financial position of the entity
2) Financial performance of the entity
3) Cash generation of the entity

Question 4

How many key things do users of financial statement want to know about?

Answer 4

3

Question 5

What do users of financial statements want to know about the financial position of an entity?

Answer 5

Whether the entity has a strong position in the market

Question 6

What do users of financial statements want to know about the financial performance of an entity?

Answer 6

The successfulness of the business, whether it’s making a reasonable profit, whether it’s utilising it’s assets to the fullest and whether in general the entity is profitable and efficient

Question 7

What do users of financial statements want to know about the cash generation of an entity?

Answer 7

Whether the entity is capable of generating positive cash flows to ensure it has sufficient cash to pay bills as they are due

Question 8

What is the purpose of ratio analysis?

Answer 8

To make comparisons against different industries, companies and time periods
Also absolute figures are of little value without context … ratio analysis provides this context and allows comparisons

Question 9

What is ratio analysis?

Answer 9

Ratio analysis uses financial and non financial data to make comparisons that can help remove the impact of scale and the impact of inflation to help the users of financial statements to make informed decisions

Question 10

What do you compare in ratio analysis?

Answer 10

1) Compare with earlier years
2) Compare with the company’s plan
3) Compare with other companies in the same industry
4) Compare with industrial average

Question 11

What should you bare in mind when you’re comparing with earlier years in ratio analysis?

Answer 11

Look out for trends and whether there is an improvement over the years

Question 12

What should you bare in mind when you’re using ratio analysis to make comparisons with the company’s plan?

Answer 12

Whether the figures are in line with the company’s expectations
Note- an outsider investor won’t be able to compare ratio analysis figures in detail with the company’s plan

Question 13

What should you bare in mind when you’re comparing with those of other companies in the same industry in ratio analysis?

Answer 13

A