Reading 19: Financial Statement Analysis- An Introduction (Financial…
Reading 19: Financial Statement Analysis- An Introduction
Provide useful information about a company's performance and financial situation
Financial Statement Analysis
Use the data from financial statement to support economic decisions.
Evaluate past performance and current situation to predict future
Show assets, liabilities, and equity at a point in time.
Assets = Liabilities + Equity
Show the results of business activities over a period.
Inflows from the company's major operations
Outflows from the company's major operations
Gains and losses
Results from the company's not-primary operations
Statement of change in equity
Report the amount and sources of changes in firm's equity.
Reconciles beginning and ending cash balance.
Operating cash flow (CFO)
Investing cashflow (CFI)
Financing cash flow (CFF)
Notes and Supplementary Documents
Basis of presentation
Accounting methods and assumptions
Further information on amounts in primary statements
Acquisitions and disposals
Stock options, benefits plans
Nature of the business (key operations)
Results from operations, business overview
Trends in sales and expenses
Capital resources and liquidity
Cash flow trends
Discussion of critical accounting choices
Effects of inflation, price changes, uncertainties on future results
Statement of comprehensive income
Reports all changes in equity except for shareholder transactions such as issuing or buying-back shares
To provide an opinion on the fairness and reliability of the statements
Appropriate accounting principles are used
that there is no material errors in the statements.
Management's report on internal control is reviewed
(unmodified, clean) BEST
Statements are free from material omissions and errors
Statements are not presented fairly.
Unable to express opinion
Broadly speaking the reports are true and fair. But, disagree on some accounting principles.
Independent review of company's financial statements
Standard auditor's opinion
Responsibility of management to prepare accounts
Independence of auditors
Properly prepared in accordance with relevant accounting principles
Reasonable assurance that the statements are free from material misstatement
Accounting principles and estimates are reasonable
Critical audit matters
Highlight significant accounting choices
Choices requiring significant judgements/ estimates
How significant transactions were accounted for
Which choices are complex or are easily misstated?
Other Information Sources
Quarterly and Semiannual reports
Updated of major financial statements and footnotes
Issued when shareholder vote is required; contain information on board elections, management compensation, stock options
written by management
Information on industry & peers companies
From trade journals, reporting services, government agencies
Financial statement analysis framework
S1: State the analysis objective
S2: Gather data
S3: Process the data
S4: Analyze and interpret data
S5: Report the conclusions and recommendation
S6: Update the analysis