2015, Study Session # 7, Reading # 22

FINANCIAL STATEMENT ANALYSIS: AN INTRODUCTION

FSA = Financial
Statement
Analysis
IASB = International
Accounting
Standard
Board

22.a

Financial reporting way companies show their financial performance to different parties by preparing &
presenting F.S.

Role of FSA is to use the information in a companys F.S, along with other relevant information, to make
economic decision.

IASBS framework describe
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.

G/L = Gain & Loss

CF = Cash Flows
PPE = Property,
Plant,
Equipment
FS = Financial
Statements

Financial Statements

22.b

Income Statement

Balance Sheet

Cash flow Statement

Statement of changes
in owners Equity

Revenue

Expense

G/L

Operating CF

Investing CF

Financing CF

Amounts
charged
for
delivery of
goods and
services in
the
ordinary
course of
business.

Relate to
outflows,
depletion of
assets and
incurrences
of liabilities
which
decrease
equity.

in
equity or
net assets
from
peripheral
or
incidental
transactions

Cash effects of
transactions
that involve
normal business
of firm

Resulting from
acquisition or sale of
PPE, subsidiary or
segment, securities
& investments in
other firms

Resulting
from issuance
& retirement
of debt &
equity

Assets
Resources
a company
controls.

22.c

Liabilities
Obligations
to lenders
and
creditors.

Reports the amount

& sources of in
equity investors
investment

Owners Equity
Residual interest in the
net assets of an entity

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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2015, 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 auditors 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 companys website.

22.f

State objective
& context
Determine what
questions, their form,
resources & time
frame.

Financial Statement Analysis Framework

Gather Data

From F.S,
management,
suppliers etc

Process the data

Make appropriate
adjustments to F.S,
calculate ratios &
common size
statements

Analyze &
interpret the data

Use data to answer

questions in 1st step.

Report the conclusions

or recommendations

Prepare report &

communicate to
intended audience

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Update the analysis

Change conclusion or
recommendation when
necessary