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Financial Reporting and Analysis (Statutory Financial Reports (14-A (Proxy…
Financial Reporting and Analysis
Statutory Financial Reports
20-F
Registration statement or annual report by foreign issurers
8-K
Current Report
10-Q
Quarterly Report
14-A
Proxy statement
Prospectus
Form 10-K
Annual Report
Environmental Factors
International Financial Reporting Standards (IFRS)
Managers of Companies
Securities and Exchange Commission (SEC)
Auditing
Corporate Governance
Alternative information sources
Voluntary Disclosure
Expectations Adjustment
Signaling
Legal liability
Managing expectations
Information Intermediaries
collecting, processing, interpreting & disseminating company information
Economic, Industry & Company News
Impacts current & future financial condition and performance
Desirable Qualities of Accounting Information
Relevance
the capacity of information to affect a decision
Reliability
For information to be reliable it must be verifiable, representationally faithful, and neutral
faithfulness
neutrality
Verifiability
Important Accounting Principles
Accrual Accounting
recognize revenues when earned, expenses when incurred
Materiality
threshold when information impacts decision making
Historical Cost
fair & objective values from arm’s-length bargaining
Conservatism
reporting or disclosing the least optimistic information about uncertain events and transactions
Limitations of Accounting Information
Frequency
prepared periodically
each quarter
Forward Looking
contain limited forecasts
Timeliness
prepare every quarter
Foundations of Accrual Accounting
Revenue Recognition
Revenues are organised when both earned and either realized or relizable
Expense Matching
Accrual accounting dictates that expenses are matched with corresponding revenues
Accounting Vs Economic income
Reasons for difference
Historical cost
Transaction basis
Alternative income concepts
Conservatism
Earnings management
Fair value accounting
Asset and liability values are determined on the basis of their fair values on the measurement date
Advantages
Consistent measurement criteria
Comparability
Reflects current information.
No conservative bias
More useful for equity analysis
Disadvantages
Susceptibility to manipulation. Use of Level 3 inputs.
Lack of conservatism.
Excessive income volatility.
Lower objectivity
Implications for Analysis
Restating income
Analyzing use of inputs
Focus on the balance sheet
Analyzing financial liabilities
Accounting Analysis
Demand for Accounting Analysis
Sources of Accounting Distortions
Accounting Standards
Estimation Errors
Reliability vs Relevance
Earnings Management
Process of Accounting Analysis
Evaluate extent of accounting flexibility
Determine the reporting strategy
Identify and assess key accounting policies
Identify and assess red flags
Adjusting Financial Statements