Financial Reporting and Statement Analysis (purpose) =
Financials are reported as it is useful info for investors/prospects/lenders etc.
FSA is used to make economic decisions from the financial statements.
Balance Sheet (statement of financial condition/position) =
report's firm's financial position at a point in time.
Made up of: ASSETS - resources controlled by the firm
LIABILITIES - amounts owed to lenders
OWNER'S EQUITY - residual interest in the net assets of an entity after deducting the liabilities
ASSETS = LIABILITIES + EQUITY
Statement of comprehensive income =
reports all changes in equity except for shareholder transactions (ie issuing stock, repurchasing stock, paying dividends)
Income statement (statement of operations/profit and loss statement) =
reports on financial performance of the firm over a period of time.
Made up of: REVENUES: Inflows from the firm's central operations
EXPENSES: outflows (stemming) from the firm's central operations
OTHER INCOME: gains that may or may not arise in the normal course of business
Statement of changes in equity =
reports the amount and sources of changes in equity investors' investment in the firm over a period of time.
Statement of cash flows =
reports the company's cash receipts and payments.
OPERATING CFs: from normal business of the firm.
INVESTING CFs: from buy/sell PP&E, subsidiary, securities, investments in other firms
FINANCING CASH FLOWS: from issuance/retirment of firm's debt and eq securities, including dividends paid.
Financial Statement Notes =
Extra notes covering:
Fiscal period of the statement, inclusion of consolidated entities.
Accounting methods, assumptions, estimates used by management.
Info on business acquisitions & disposals, legal actions, employee benefit plans, contingencies and commitments, significant customers, sales to related parties, and segments of the firm.
Management's discussion & analysis (MD&A) =
discusses nature of the business, past performance, future outlook. Commentary may be unaudited.
SEC reqs inclusion of: liquidity factors, capital resources, results of operations (?)
Also: material inflation effects, contractual/off-balance sheet obligations, accounting policies that require significant judgment by management, forward-looking expenditures and divestitures.
independent review of FinStatements to provide an objective assessment of the reliability/accuracy.
3 Parts to an auditor's opinion =
Whereas the financial statements are prepared by management and are its responsibility, the auditor has performed an independent review.
Generally accepted auditing standards were followed, thus providing reasonable assurance that the financial statements contain no material errors.
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.
Unqualified opinion =
indicates that the auditor believes the statements are free from material omissions and errors.
Qualified Opinion =
If the statements make any exceptions to the accounting principles, the auditor may issue a qualified opinion and explain these exceptions in the audit report.
Adverse opinion =
The auditor can issue an adverse opinion if the statements are not presented fairly or are materially nonconforming with accounting standards.
Disclaimer of Opinion =
If the auditor is unable to express an opinion (ie, scope limitation)
Explanatory paragraph (from an auditor) =
when a material loss is probable but the amount cannot be reasonably estimated.
May relate to:
'going concern assumption' - assumption that the firm will continue to operate for the foreseeable future
valuation/realization of asset values
MAY BE A SIGNAL OF SERIOUS PROBLEM AND A FOCUS POINT FOR AN ANALYST
Internal Controls =
internal process to ensure compliance with standards.
Under GAAP the auditor must assess the level of internal controls.
Could be presented separately or as part 4 of the standard auditor's opinion.
What reports are filed by a company and where?
On EDGAR, www.sec.gov.
8-K - for acquisitions/disposals of major assets of changes in its management or corporate governance
10-K - annual
10-Q - quarterly
Proxy statement =
issued to shareholders when there are matters that require a shareholder vote
election of boardmembers
issuance of stock options
Extra info =
corporate reports/press releases
earnings guidance (pre fin st release)
competitors - comparison to
From: trade journals, reporting services, gov agencies
Steps in FSA framework (x6)
State the objective and the context
Process data incl ratio calculations, graphs etc
Analyse and Interpret the data (answer question/objective)
Report conclusions/recommendation - write up analysis (complying with reporting standards)