Chapter 16 - Intro to Financial Statement Analysis

Question 1

Role of Financial Reporting

Answer 1

To provide a variety of users with useful information about a company’s performance and financial position.

Question 2

Role of Financial statement analysis

Answer 2

To use the data from financial statements to support economic decisions - such as investing.

Question 3

Balance Sheet

Answer 3

Statement of financial position. Shows assets, liabilities and owners equity at a point in time. Equity = Assets - liabilities

Question 4

Statement of Comprehensive Income. Income Statement.

Answer 4

Shows the results of a firm’s business activities “over the period”. Revenues, the cost of generating those revenues and resulting profit/loss are presented here. Shows revenue, expense and other income.

Question 5

Statement of Changes in Equity

Answer 5

Reports the amount and sources of changes in the equity owners’ investment in the firm.

Question 6

Statement of Cash flows

Answer 6

Shows the sources and uses of cash over the period. Operating cash flow (transactions during normal business), Investing cash flows (resulting from acquisition/sale of property, plant, equipment, securities, investment. Financing cash flows - issuance/retirement of firms debt/equity securities, dividends.

Question 7

Footnotes to financial statements

Answer 7

Important information about accounting methods, estimates, and assumptions and supplementary schedules. Also contain info about: segment results, commitments and contingencies, legal proceedings, acquisitions, issuance of stock options and employee benefit plans.

Question 8

Management Commentary/Management Discussion and analysis

Answer 8

Overview of the company and important info about business trends, future capital needs, liquidity, significant events, significant choices of accounting methods requiring management judgment. Affects of inflation.

Question 9

Objective of audits of financial statements

Answer 9

Provide an opinion on the statements’ fairness and reliability

Question 10

Auditors Opinion

Answer 10

Gives evidence of independent review of financial statements showing 1. proper accounting measures were used 2. standard auditing procedures were used to establish reasonable assurance that statements contain no material erros 3. management’s report on company’s internal controls has been reviewed.

Question 11

Unqualified Opinion

Answer 11

Clean. Free from material omissions and errors

Question 12

Qualified Opinion

Answer 12

Notes any exceptions to accounting principles

Question 13

Adverse opinion

Answer 13

statements are not presented fairly in the auditors opinion

Question 14

Disclaimer of Opinion

Answer 14

Auditor is unable to express an opinion

Question 15

Management

Answer 15

responsible for maintaining an effective internal control system to ensure accuracy of financial statements

Question 16

Sources for an analyst

Answer 16

Quarterly/Semiannual reports, proxy statements, press releases, earnings guidance, info on industry and peer companies from external sources

Question 17

Framework

Answer 17

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

Question 18

Accounting equation

Answer 18

Assets = liabilities + owners equity

Question 19

Capital Structure

Answer 19

% of company’s liabilities and equity used to finance a company

Question 20

Internal controls

Answer 20

processes by which the company ensures that it presents accurate financial statements

Question 21

PRoxy statement

Answer 21

issues to shareholders for matters that require a vote