Chapter 15

Question 1

Financial reporting

Answer 1

refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements.

Question 2

financial statement analysis

Answer 2

is to use the information in a company’s financial statements, along with other relevant information, to make economic decisions

Question 3

balance sheet

Answer 3

(also known as the statement of financial position or statement of financial condition) reports the firm’s financial position at a point in time. The balance sheet consists of three elements:

1.   Assets - resources controlled by the firm.
2.   Liabilities - amounts owed to lenders and other creditors.
3.   Owners’ equity (also shareholders’ equity, shareholders’ funds, or net assets) - the residual interest in the net assets of an entity that remains after deducting its liabilities from its assets.

Question 4

accounting equation

Answer 4

assets = liabilities + owners’ equity

Question 5

capital structure

Answer 5

The proportions of liabilities and equity used to finance a company

Question 6

statement of comprehensive income

Answer 6

reports all changes in equity except for shareholder transactions (e.g., issuing stock, repurchasing stock, and paying dividends).

Question 7

income statement

Answer 7

(also known as the statement of operations or the profit and loss statement) reports on the financial performance of the firm over a period of time. The elements of the income statement include revenues, expenses, and gains and losses.

• *Revenues** are inflows from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
• *Expenses** are outflows from delivering or producing goods or services that constitute the entity’s ongoing major or central operations.
• *Other income** includes gains that may or may not arise in the ordinary course of business.

Question 8

statement of changes in equity

Answer 8

reports the amounts and sources of changes in equity investors’ investment in the firm over a period of time.

Question 9

statement of cash flows

Answer 9

reports the company’s cash receipts and payments. These cash flows are classified as follows:

Operating cash flows include the cash effects of transactions that involve the normal business of the firm.

Investing cash flows are those resulting from the acquisition or sale of property, plant, and equipment; of a subsidiary or segment; of securities; and of investments in other firms.

Financing cash flows are those resulting from issuance or retirement of the firm’s debt and equity securities and include dividends paid to stockholders.

Question 10

Financial statement notes (footnotes)

Answer 10

include disclosures that provide further details about the information summarized in the financial statements. Footnotes allow users to improve their assessments of the amount, timing, and uncertainty of the estimates reported in the financial statements

Question 11

Management’s Discussion and Analysis (MD&A)

Answer 11

(also known as management’s report, operating and financial review, and Management’s commentary) is one of the most useful sections of the annual report. In this section, management discusses a variety of issues. IFRS guidance recommends that management commentary address the nature of the business, management’s objectives, the company’s past performance, the performance measures used, and the company’s key relationships, resources, and risks. Analysts must be aware that some parts of management’s commentary may be unaudited.

Question 12

audit

Answer 12

is an independent review of an entity’s financial statements. Public accountants conduct audits and examine the financial reports and supporting records. The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements.

Question 13

standard auditor’s opinion contains three parts and states that:

Answer 13

1. Whereas the financial statements are prepared by management and are its responsibility, the auditor has performed an independent review.
2. Generally accepted auditing standards were followed, thus providing reasonable assurance that the financial statements contain no material errors.
3. The auditor is satisfied that the statements were prepared in accordance with accepted accounting principles and that the principles chosen and estimates made are reasonable. The auditor’s report must also contain additional explanation when accounting methods have not been used consistently between periods.

Question 14

unqualified opinion

Answer 14

(also known as an unmodified or clean opinion) indicates that the auditor believes the statements are free from material omissions and errors.

Question 15

qualified opinion

Answer 15

If the statements make any exceptions to the accounting principles, the auditor may explain these exceptions in the audit report

Question 16

adverse opinion

Answer 16

if the statements are not presented fairly or are materially nonconforming with accounting standards

Question 17

disclaimer of opinion

Answer 17

If the auditor is unable to express an opinion (e.g., in the case of a scope limitation)

Question 18

modified opinion

Answer 18

Any opinion other than unqualified

Question 19

Internal controls

Answer 19

are the processes by which the company ensures that it presents accurate financial statements. Internal controls are the responsibility of management.

Question 20

Proxy statements

Answer 20

are issued to shareholders when there are matters that require a shareholder vote. These statements, which are also filed with the SEC and available from EDGAR, are a good source of information about the election of (and qualifications of) board members, compensation, management qualifications, and the issuance of stock options.

Question 21

The framework for financial analysis has six steps:

Answer 21

1. State the objective of the analysis.
2. Gather data.
3. Process the data.
4. Analyze and interpret the data.
5. Report the conclusions or recommendations.
6. Update the analysis.