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Flashcards in CFA R22 Deck (26)
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1
Q

balance sheet

A

(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 are the resources controlled by the firm.
2. Liabilities are amounts owed to lenders and other creditors.
3. Owners’ equity is the residual interest in the net assets of an entity that remains after
deducting its liabilities.

2
Q

comprehensive income

A
reports all changes in equity expect for
shareholder transactions (e.g., issuing stock, repurchasing stock, and paying dividends
3
Q

income statement

A

(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.

4
Q

IFRS vs GAAP treatment of i/s and statement of comprehensive income

A

Under IFRS, the income statement can be combined with “other comprehensive
income” and presented as a single statement of comprehensive income. Alternatively, the income statement and the statement of comprehensive income can be presented
separately. Presentation is similar under U.S. GAAP except that firms can choose to
report comprehensive income in the statement of shareholders’ equity.

5
Q

statement of changes in equity

A

reports the amounts and sources of changes in

equity investors’ investment in the firm over a period of time.

6
Q

statement of cash flows

A

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

7
Q

Financial statement notes (footnotes)

A

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.
Footnotes:
• Discuss the basis of presentation such as the fiscal period covered by the statements
and the inclusion of consolidated entities.
• Provide information about accounting methods, assumptions, and estimates used by
management.
• Provide additional information on items such as business acquisitions or disposals,
legal actions, employee benefit plans, contingencies and commitments, significant
customers, sales to related parties, and segments of the firm.

8
Q

Management’s commentary

A

discusses the nature of the business, past performance, and future outlook.

Analysts must be aware that some parts of management’s commentary may be unaudited.

SEC requires that MD&A discuss
trends and identify significant events and uncertainties that affect the firm’s liquidity,
capital resources, and results of operations. MD&A must also discuss:
• Effects of inflation and changing prices if material.
• Impact of off-balance-sheet obligations and contractual obligations such as purchase
commitments.
• Accounting policies that require significant judgment by management.
• Forward-looking expenditures and divestitures.

9
Q

standard auditor’s opinion

A

contains three parts and states that:
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.

The auditor’s opinion will also contain an explanatory paragraph when a material loss
is probable but the amount cannot be reasonably estimated. These “uncertainties” may relate to the going concern assumption (the assumption that the firm will continue to
operate for the foreseeable future) , the valuation or realization of asset values, or to
litigation. This type of disclosure may be a signal of serious problems and may call for
close examination by the analyst.

10
Q

unqualified opinion

A

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

11
Q

qualified opinion

A

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

12
Q

adverse opinion

A

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

13
Q

disclaimer of opinion

A

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

14
Q

Internal controls

A

are the processes by which the company ensures that it presents
accurate financial statements. Internal controls are the responsibility of management.
Under U.S. Generally Accepted Accounting Principles (GAAP), the auditor must
express an opinion on the firm’s internal controls. The auditor can provide this opinion separately or as the fourth element of the standard opinion

15
Q

8-K

A

a company must file to report events such as acquisitions and disposals
of major assets or changes in its management or corporate governance

16
Q

financial statement analysis framework consists of six steps:

A

Step I: State the objective and context.
Step 2: Gather data.
Step 3: Process the data.
Step 4: Analyze and interpret the data.
Step 5: Report the conclusions or recommendations..
Step 6: Update the analysis.

17
Q

Management’s commentary-other names

A

[also known as management’s report, operating and financial review, and management’s discussion and analysis (MD&A)]

18
Q

Step I: State the objective and context

A

Determine

  • what questions the analysis seeks to answer, -the form in which this information needs to be presented,
  • what resources and how much time are available to perform the analysis.
19
Q

Step 2: Gather data

A

Acquire the company’s financial statements and other relevant data
on its industry and the economy. Ask questions of the company’s management,
suppliers, and customers, and visit company sites.

20
Q

Step 3: Process the data

A

Make any appropriate adjustments to the financial statements.
Calculate ratios. Prepare exhibits such as graphs and common-size balance
sheets.

21
Q

Step 4: Analyze and interpret the data

A

Use the data to answer the questions stated in
the first step. Decide what conclusions or recommendations the information
supports.

22
Q

Step 5: Report the conclusions or recommendations.

A

Prepare a report and communicate it
to its intended audience. Be sure the report and its dissemination comply with
the Code and Standards that relate to investment analysis and recommendations

23
Q

Step 6: Update the analysis

A

Repeat these steps periodically and change the conclusions

or recommendations when necessary.

24
Q

The role of financial statement analysis

A

use the data from financial statements to

support economic decisions

25
Q

role of financial reporting

A

to provide a variety of users with useful information

about a company’s performance and financial position

26
Q

Statement of Comprehensive income

pg 16, reread!

A

Can be presented in 2 ways under IFRS

1) single statement of comprehensive income
2) income statement, and then a statement of comprehensive income that begins with p/l from income statement