FINANCIAL REPORTING AND ANALYSIS

FINANCIAL STATEMENT
ANALYSIS:INTRODUCTION
Reading - 22

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Role of Financial reporting and FSA

The role Financial reporting is to provide information about a
companys financial position and performance which can be used
by external and internal parties related to the company.
The role of Financial statement analysis is to use these financial
statements to judge the past present and prospective financial
position from the purpose of making investments and other
financial decisions.
Financial
statement users

Equity investors are

interested in companys
long term growth
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Short term creditors

are interested in
companys liquidity
because they always
want an early payback

Long term creditors Are

always concerned in
the companys earning
power and long term
assets .
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Role of key Financial Statements : Income Statement

The Income 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.

Income Statement Format :-

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+
+/=
=
+/+/+/=

Revenue from sale of goods and services

Other Income and expenses
Operating Expenses
Financing Costs
unusual or infrequent items
Pretax earnings from Continuing operations
Income Tax Expense
Net Income from continuing operations
Income from discontinued operations
Extra ordinary Items
Cummulative effect of accounting changes
Net Income

Role of key Financial Statements : Income Statement . .

Revenues

Inflows from delivering or producing goods or

giving services.

Expenses

Outflows from delivering or producing goods or

giving services which are a part of operations.

Gains and
losses

Are increases or decreases in equity or net

assets.

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Role of key Financial Statements : Balance Sheet Statement

Balance Sheet provides the companys financial position at a
specific point in time .
Assets = Liabilities + Owners Equity
Resources which are controlled by the company.
Assets

Financial obligations that the company must fulfill in the future.

Liabilities

Equity
Ownership

Owners investments and finances provided by the owners of the

company.

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Role of key Financial Statements : Cash Flow Statement

It reports the cash receipts and cash outflows according to the
Operating , Financing and Investing activities.
Operating
Cash Flows

Investing
Cash Flows

Financing
Cash Flows

Transactions that involve the normal business of the firm

Activities resulting in sale or buying of property plant or

equipment , securities and investments in other firms.

Dividends paid to stockholders , issuance or retirement of firms

debt.
Issuance or retirement

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Statement of changes in Owners Equity

It reports the amounts and sources of changes in equity from
capital transactions with owners.
It reports ownership interests in order of preference upon
liquidation and dividends.

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Financial Statement Notes and Supplementary Schedules

Financial Foot notes provide information about the
accounting methods , assumptions and estimates used by the
management to develop the data reported in the financial
statements.
Additional disclosure is provided in areas such as income taxes
inventory methods , fixed assets , debt , pensions.

Supplementary Schedules provide additional information

about companys assets and liabilities as supplementary data
outside the financial statements.
Examples of such disclosures include :
Operating income or sales by region or business segment
Oil and gas reserves reported by the oil and gas companies.
Impact of changing prices , sales revenue.
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Management s Discussion and Analysis (MD&A)

Requires the management to assess the companys current
financial condition , liquidity and planned capital expenditure
for the next year.
For publicly held companies in the United States the MD&A is
required to discuss results from operations ,discussion of trends
in sales and expenses ,capital resources and liquidity and a
general business overview based on known trends.
The MD&A section is not audited and it is for public companies
only.

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Objectives of audits of Financial Statements and Auditors Reports

An Audit is an independent review of an entitys financial

statements
The objectivity revolves around the fairness and reliability of the
financial statements.

The Auditor is responsible for seeing that the financial

statements issued comply with the Generally Accepted
Accounting Principles(GAAP).
The Auditor examines the companys accounting and internal
control systems.
Auditors are supposed to be independent though they are hired
by the government.

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Types of Audit Reports

Unqualified Opinion Report:

Companys financial condition ,

position are fairly presented in the
financial statements. It is in accordance
with GAAP and free of misstatements.

Qualified Opinion Report :

It is issued when there are situations

which are exceptions to the accounting
principles like(GAAP).

Audit Reports
Adverse Opinion Report :
It is issued when statements are not
presented fairly or when they do not
comply with the accounting standards.
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Disclaimer of Opinion : It is issued

when an auditor tried to audit a
company but could not complete due
to various reasons and does not issue
an opinion.
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Other Sources Of information Used by Analysts

Interim
Reports

Proxy
Statements

Corporate
Reports and
Press Releases

These reports are generally unaudited .

Publicly held companies must file form 10-Q(Interim Report) on a
quarterly basis.

It contains information regarding compensation , management

Qualifications and stock options.
These are issued to the shareholders and are filed with the SEC.

These are the public relations or the sales material written by the
management.

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Financial Statement Analysis framework

Objective and
context of the
Analysis

Define the purpose of the analysis , information presentation ,

time availability and budget.

Gather Data

Gathering companys financial data and also information on the

economy and industry to understand the environment in which
the company operates.

Process the data

This involves calculation of ratios , preparing graphs ,performing

statistical analyses and preparation of common size balance
sheets.

Analyze and
interpret the data

Interpreting the output and using the data to answer the

questions .

Report the
conclusions or
recommendations

Prepare the report and communicate the conclusion and

recommendation in the right format to the target audience.

Update the
Analysis
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Changing the conclusions or recommendations when necessary

by periodically repeating the above steps.
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