Financial Statement Analysis Flashcards
(102 cards)
6business segment or operating segment
accounts for more than 10% of the company’s revenues, assets, or income
Management commentary, or management discussion and analysis (MD&A)
assessment of the financial performance from the perspective of its management;
Effects of inflation and changing prices, if material
Trends, significant events,
Impact of off-balance-sheet and contractual obligations
Accounting policies that require significant judgment
Forward-looking expenditures and divestitures
audit
opinion on the fairness and reliability of the financial reports. financial statements are prepared by management and are its responsibility, the auditor has performed an independent review., reasonable assurance that the financial statements contain no MATERIAL errors.,
auditor is satisfied that the statements were prepared in accordance with accepted accounting principles and that the accounting 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.
unqualified opinion (also known as an unmodified opinion or clean opinion)
free from material omissions and errors; Any opinion other than unqualified is sometimes referred to as a modified opinion.
qualified opinion
explain these exceptions in the audit report statements make any exceptions to the accounting principles
adverse opinion
statements are not presented fairly or are materially nonconforming with accounting standards,
disclaimer of opinion
auditor is unable to express an opinion
Under U.S. GAAP, the auditor must state an opinion on a publicly traded company’s internal controls, the processes by which the company ensures that it presents accurate financial statements
responsibility of the firm’s management
Proxy statements are issued to shareholders when there are matters that require a shareholder vote.
filed with the SEC and available from EDGAR
GAAP vs IFRS
Based on Rules vs Principles;
FIFI, LIFO, weighted average vs no LIFO;
developement cost expensed vs may be capitalized;
interest is CFO vs CFO or CFF;
reversal of inventory write down no vs allowed;
revenue recognition
goods are exchanged for cash and returns are not allowed, rev recognized at time of exchange, not cash pmt received, create accounts receivable;
If payment for the goods is received before the transfer of the good, unearned rev e.g. subscription;
long-term contracts, revenue is recognized based on a firm’s progress toward completing a performance obligation e.g. input: % of completion cost incurred or output: % of total output delivered.
expense recognition
accrual method: matching principle=expense COGS recognized as revenue is recognized. for expenses not tied to rev (admin cost)=period costs expensed in the period incurred;
warranty expense at time of sale (esetimate);
depreciation and amort capitalized and release as cost to match with benefit;
cost of long-lived assets must also be matched with revenues; expenditure create benefit over long time is capitalized; but if the future benefit is highly uncertain, expensed as incurred (depreciation, amortization, depletion).
interest accrued from building asset for own use is capitalized as asset cost, not in income stmt as interest expense but depreciation expense (asset is held for use) or COGS (held for sale), CFI!!!! not as CFO (GAAP) or CFO/CFF (IFRS);
research costs are expensed; developement cost GAAP expensed, IFRS expensed or capitalized (intangible asset, technical feasibility, intention to complete/use/sell, can generate cash flow). IFRS treat cost of creating software to sale like R&D;
sell g&s on cretdit or warranty, matching principal=estimate bad-debt expense/warranty expense as recog rev;
delay recog expense increase NI=more aggressive;
Nonrecurring Items
discontinued operation=decided not yet disposed or disposed, g&l repoerted seperated in after tax at continuing operations income stmt; do not affect net income from continuing operations and exclude when forecast future earnings;
Unusual or infrequent items=sales of assets g&l as BAU, impairments, write-offs, write-down, restructuring cost are income from continuing operations
accounting changes
retrospective=restate prior period, enhance comparibility over time; changes in accounting POLICY=inventory method or capitalizing rather than expensing, changes in the classification noncur or cur of financial assets and liabilities, specific purchases are retrospective;
prospective=prior statements are not restated, and the new policies are applied only to future; Changes in ESTIMATES (new info, mgmt judgement, do not affect cash flow)=depreciation methods useful life, provision for doubltful accounts;
modified retrospective=not change past but adjust begining amount cumulatively;
Retrospective restatement for corrections of errors is required;
EPS
Potentially dilutive securities=stock optoins, warrants, convert debt, convert pref stock; decrease EPS if execercised/convert to CS;
antidilutive=increase EPS if converted;
simple vs complex capital structure=assume no potential dilutive securities vs yes;
Weighted average shares outstanding=weight share by portion of year outstanding (split and div applied to beg of year);
basic EPS=no potential dilutive=(NI-pref div)/weighted avg CS shares outstadning, no PS shares in numerator; calc each seperately:
convertible stock dilutive?=convertible pref stock div/#shares from conversion of PS;
convertible debt dilutive?=converitble debt int(1-tax)/#shares from conversion of conv debt; <1 dilutive;
diluted EPS=(NI-PSdiv+debt div(1-t)+pref div)/(weighted avg CS+con PS shares+debt shares+issuable from stock options);
Options and warrants are dilutive whenever the exercise price is less than the average stock price; new shares=(avg mk price-excercise price)/avg mkt price*# shares conv options/warrants
vertical common-size income statement
each category as a percentage of revenue; time-series and cross-sectional analysis for firms sizes;
Gross profit margin
gross profit/revenue
net profit margin
NI/Rev
Other comprehensive income
defined benefit pension plans remeasuerment, FX adjustment, cash flow hedges, AFS unrealized g&l
capitalizing vs expense
spread cost in IS over time, creat BS asset;
take cost expense now
Intangible assets
nonmonetary assets that lack physical substance;
cost is amortized if finite life, recorded at fair value;
unidentifiable intangible asset that cant be purchased separately and have indefinite life; goodwill not amortized but impairment;
or finite life identifiable intangible that can be renewed at minimal cost (trademarks) are not amortized but impaired.
appear on group account but not individual company account;
if gain, take out of BS and put in stockholder’s equity; if loss (acquire price>fair value) buyer, loss on IS impaired
intangible assets that are created internally, including R&D costs, are expensed as incurred in under U.S. GAAP, except software internally developed for sale (technical feasibility) for use (probable completion and use as intended); capitalize development cost under IFRS if technically feasible;
expensed:
Start-up and training costs
Administrative overhead
Advertising and promotion costs
Relocation and reorganization costs
Termination costs
goodwill
business bought for more than fair value of asset net of liability;
not amortized but impairment, decrease in fair value at least annually;
cuz not amortized, manipulate by allocate more acquisition price to goodwill and less to identifiable asset, so less dep and amort;
goodwill from business combination is capitalized on balance sheet impairment gradually, internallly generated goodwill are expensed as incurred;
exclude goodwill from BS (overpaid when acquired) and impairment charges from NI IS when analyze ratios;
goodwill impairment, not tax allowable so no effect on cash flow
IFRS, annual impairment check, allow reversal of write downs if value recover:
impaired when carrying value [=cost-accumulated depreciation] > recoverable amount [MAX(fair value-selling cost, value in use [=PV of future cash flows])],
if impaired, write down on balance sheet to the recoverable amount, an impairment loss [CV-recoverable amount] is recognized in operating loss IS;
GAAP, an asset is test for impairment only when events signal firm might not be able to recover, loss reversal prohibited for held for use:
- recoverability test: impaired if CV>future undiscounted cash flow;
- if impaired, write down to fair value on BS and recognize loss in IS equal to excess of CV-FV or discounted cash flow if FV is unkown
Accounting Treatments for Financial assets
GAAP: HTM (debt, loans, notes receivable and unlist securities with unsure fair value amortized through historical cost @BS),
AFS (fair value @BS, unrealized g&l @OCI, dividend and realized g&l @IS),
trading securities (fair value @BS, dividends and any unrealized or realized gains or losses @IS->NI->RE->shareholders equity)
IFRS: Securities measured at amortized cost, Securities measured at fair value through other comprehensive income (FVOCI), Securities measured at fair value through profit and loss (FVPL)
effective interest @IS for all
