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2013, Study Session # 7, Reading # 22

“FINANCIAL STATEMENT ANALYSIS: AN INTRODUCTION”

FSA = Financial G/L = Gain & Loss
22.a
Statement CF = Cash Flows
Analysis
Financial reporting ⇒ way companies show their financial performance to different parties by preparing & PPE = Property,
IASB = International presenting F.S. Plant,
Accounting
Role of FSA is to use the information in a company’s F.S, along with other relevant information, to make Equipment
Standard economic decision. FS = Financial
Board
IASB’S framework describe Statements
“The objective of F.S is to provide information about the financial position, performance & changes in
financial position of an entity that is useful to a wide range of users in making economic decisions.”

22.b Financial Statements

Income Statement Balance Sheet Cash flow Statement Statement of changes

in owner’s Equity

Revenue Expense G/L Operating CF Investing CF Financing CF

Amounts Relate to
in Cash effects of Resulting from Resulting Reports the amount
charged outflows, equity or transactions acquisition or sale of from issuance & sources of ∆ in
for depletion of net assets that involve PPE, subsidiary or & retirement equity investor’s
delivery of assets and from normal business segment, securities of debt & investment
goods and incurrences peripheral of firm & investments in equity
services in of liabilities or other firms
the which incidental
ordinary decrease transactions
course of equity.
Assets Liabilities Owner’s Equity
business.

Resources Obligations Residual

a company to lenders interest in
controls. and the net
creditors. assets of an
entity

22.c Financial Statement Notes

F.S notes ⇒ disclosures that provide further details about information in F.S.

Are audited & provide information about accounting methods, assumptions & estimates used by management.

Provide additional information on certain items (e.g. business acquisition or disposal, legal action etc).

Supplementary Schedules

Are not audited & provide information regarding ;

Reserve for oil & Gas Company.

Information about hedging activities & financial instruments.

Operating income or sales by region or business segment.

Management Discussion & Analysis (MD&A)

Provide assessment of financial performance & condition of a company from perspective of its management.

MD & A require to discuss results from operations, effects of trends, capital resources, liquidity & general business overview.

MD & A can include discussion of accounting policies, discontinued operation, extra ordinary items, unusual & infrequent events,
disclosures in interim F.S & segments need for CF.

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2013, Study Session # 7, Reading # 22

22.d

Audit is an independent review of F.S with an objective to provide an opinion on fairness & reliability of F.S.

Board of directors appoint audit firms and standard auditor’s opinion contain three parts as:

F.S are prepared by management & auditor has performed an independent review.

Provide reasonable assurance that F.S contains no material errors.

Statements were prepared in accordance with accepted accounting principles.

Unqualified opinion ⇒ statements are free from material omissions or errors.

Qualified opinion ⇒ statements make any exception to accounting principles

Adverse opinion ⇒ statements are not presented fairly or are materially nonconforming with standards.

Going concern assumption ⇒ firm will continue to operate for the foreseeable future.

Internal controls ⇒ processes by which company ensures it presents accurate F.S. (auditor must state opinion on it).

22.e

Analyst should examine quarterly or semiannual reports. (not necessarily audited).

Proxy statement ⇒ issued to shareholders when matters that require shareholder vote.

Corporate reports & press releases ⇒ written by management & found on company’s website.

22.f Financial Statement Analysis Framework

State objective Gather Data Process the data Analyze & Report the conclusions Update the analysis
& context interpret the data or recommendations

Determine what From F.S, Make appropriate Use data to answer Prepare report & Change conclusion or
questions, their form, management, adjustments to F.S, questions in 1st step. communicate to recommendation when
resources & time suppliers etc calculate ratios & intended audience necessary
frame. common size
statements

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