Financial Statement Analysis (1)

Question 1

Describe the role of financial statement analysis

Answer 1

Using information in a company’s financial statements along with other relevant information, to make economic decisions.

Evaluation a company’s past performance and current financial position to form opinions about a firm’s ability to earn profits and generate cash flow in the future.

Question 2

What are the financial statements components?

Answer 2

1. Income Statement
2. Balance Sheet
3. Cash flow Statement

Question 3

Describe income statement

Answer 3

It summarizes events over a period.

• Revenues
• Expensed
• Gains and losses

Question 4

Define revenues

Answer 4

Revenues are inflows from delivering or producing goods rendering services, or other activities that constitute the entity’s ongoing major or central operation.

Question 5

Define expenses

Answer 5

Expenses are outflows from delivering or producing goods and services that constitute the entity’s ongoing major or central operations.

Question 6

What does include other income?

Answer 6

Other income includes gains and losses, which may or may not arise in ordinary course of business.

Question 7

Define Statement of comprehensive income

Answer 7

It reports all changes in equity except for shareholder transactions.

Question 8

What are the balance sheet components? Define them

Answer 8

• Assets : Resources controlled by the firm
• Liabilities : Amounts owed to lenders and other creditors.
• Owners’ equity (shareholders’ equity, net assets) : Residual interest in an entity that remains after deducting liabilities from assets.

Question 9

Define Cash Flow statement.

Answer 9

It reconciles beginning and ending cash balance, three categories of cash flows :

1. Operating cash flows (CFO)
2. Investing cash flows (CFI)
3. Financing cash flows (CFF)

Question 10

Define Statement of changed in owners’ equity

Answer 10

Amounts and sources of changes in owners’ equity over the period.

Question 11

Describe the objective of financial reporting

Answer 11

The objective of financial reporting is to provide financial information that is useful to users in making decisions about providing resources to the reporting entity, where those decisions relate to equity and debt instruments, or loans or other forms of credit, and in influencing management’s actions that affect the use of the entity’s economic resources.

Question 12

Define Standard-setting bodies

Answer 12

They are typically private sector, self-regulated organizations with board members who are experienced accountants, auditors, users of financial statements, and academics.

Question 13

Define Regulatory authorities

Answer 13

They have the legal authority to enforce financial reporting requirements and exert other controls over entities that participate in the capital markets within their jurisdiction.

Question 14

What are the fundamental qualitative characteristics (2)? Describe them

Answer 14

1. Relevance : Information is relevant if it would potentially affect or make a difference in users’ decisions
2. Faithful representation : Information that faithfully represents an economic phenomenon that it purports to represent is ideally complete, neutral, and free from error.

Question 15

What are the enhancing qualitative characteristics? Describe them

Answer 15

1. Comparability : Comparability allows users to identify and understand similarities and differences of items.
2. Verifiability : Verifiability means that different knowledgeable and independent observers would agree that the information presented faithfully represents the economic phenomena it purports to represent.
3. Timeliness : Timely information is available to decision makers prior to their making a decision.
4. Understandability : Clear and concise presentation of information enhances understandability. Information should be prepared for and be understandable by users who have a reasonable knowledge of business and economic activities, and who are willing to study the information with diligence

Question 16

Define

a. Assets
b. Liabilities
c. Equity

Answer 16

A. Assets : A present economic resource controlled by the entity as a result of past events.

B. Liabilities : A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid.

C. Equity : Assets less liabilities.

Question 17

Define

a. Income

b. Expenses

Answer 17

a. Increases in economic benefits :
Enhancement of assets
Decrease of liabilities
Revenue and gains

b. Decreases in economic benefits :
Outflow/depletion of assets
Increases in liabilities
Expenses and losses

Question 18

Described the required finalement statements under IAS 1

Answer 18

• Balance Sheet
• Income statement
• Statement of comprehensive income
• Change in equity
• Chase flow statement
• Accounting policies, note

Question 19

Describe the fundamental principales under IAS 1

Answer 19

Fair presentation
Goin concern
Accrual bais
Consistency
Materiality 

*See definitions in notes

Question 20

Describe the presentation requirements under IAS 1

Answer 20

Aggregate where appropriate
No offsetting
Classified balance sheet
Minimum information on face
Minimum disclosure
Comparative info

*See definition in notes

Question 21

Describe the SEC filings/Forms (7)

Answer 21

• S1 : Registration of securities for public sale
• 10K : Annual Report
• 10Q : Quaterly reports
• DEF 14A : Proxy Statements
• 8K : Material Events
• Form 144 : Issuance of unregistered stock
• Forms 3,4 & 5 : Share transactions with corporate insiders

Question 22

Describe financial statement notes

Answer 22

• The notes provide information that is essential to understanding the information provided in the primary statements
• The notes disclose the basis of preparation for the financial statements.
• The notes also disclose information about the accounting policies, methods, and estimates used to prepare the financial statements.
• A company’s significant accounting choices (policies, methods, and estimates) must be discussed in the notes to the financial statements.

Question 23

Describe Management Commentary (Management’s Discussion and Analysis)

Answer 23

The framework identifies five content elements of a “decision-useful management commentary:”

a. The nature of the business
b. Management’s objectives and strategies
c. The company’s significant resources, risks, and relationships
d. Results of operations; and 5) critical performance measures.

Question 24

Define Audits Report

Answer 24

The independent auditor then provides a written opinion on the financial statements.

Question 25

What are the audit opinions? (4)

Answer 25

1. Unqualified audit opinion (unmodified or clean opinion) : An unqualified audit opinion states that the financial statements give a “true and fair view” (international) or are “fairly presented” (international and US) in accordance with applicable accounting standards.
2. Qualified audit opinion : A qualified audit opinion is one in which there is some scope limitation or exception to accounting standards.
3. Adverse audit opinion : An adverse audit opinion is issued when an auditor determines that the financial statements materially depart from accounting standards and are not fairly presented
4. Disclaimer of opinion : Disclaimer of opinion The auditors are unable to issue an opinion.

Question 26

Describe the steps in the financial statement analysis framework (6)

Answer 26

See charts in note