Financial Statement

Analysis An Introduction

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 Role of Financial Reporting and FSA
The role of 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

Short term creditors Long term creditors Are

Equity investors are are interested in always concerned in
interested in companys companys liquidity the companys earning
long term growth because they always power and long term
want an early payback assets .

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 Role of FRA
Performance
(Profitability, Cash Flow)

Forecast
Evaluate
Past & Future
Present

Financial Position

Financial reports provide information about companies performance, financial

position, changes in financial position
Purpose of analysis: making investment, credit, economic decisions

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 Role of Key Financial Statements
Key financial statements
Income statements
Balance sheet
Cash flow statement
Statement of changes in
owners equity

Supplementary information
Footnotes
Management discussion & analysis
External auditors report

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 Role of the Income Statement

Presents financial performance

Also called statement of operations and profit and loss statement

Basic Philospophy

Net Income = Revenues - Expenses

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 Role of the Balance Sheet

Presents financial position of company

Also called statement of financial position

Basic Philosophy

Assets Liabilities = Owners equity

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 Role of the Cash Flow Statement
Presents the sources and uses of cash

Three activities for Cash Transactions

Operating: the day-to-day transactions that determine net income
Investing: activities related to acquisition and disposal of long-term assets
Financing: activities related to obtaining or repaying capital

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 Role of Changes in Owners Equity

Presents the changes in equity

Also called statement of shareholders equity and statement of
retained earnings
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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 Types of Audit Reports
Unqualified Opinion Report:
Qualified Opinion Report :
Companys financial condition ,
It is issued when there are situations
position are fairly presented in the
which are exceptions to the accounting
financial statements. It is in accordance
principles like(GAAP).
with GAAP and free of misstatements.

Audit Reports

Adverse Opinion Report : Disclaimer of Opinion : It is issued

when an auditor tried to audit a
It is issued when statements are not company but could not complete due
presented fairly or when they do not to various reasons and does not issue
comply with the accounting standards. an opinion.

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 Other Sources Of Information Used by Analysts
These reports are generally unaudited .
Publicly held companies must file form 10-Q(Interim Report) on a
Interim quarterly basis.
Reports

It contains information regarding compensation , management

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

Corporate These are the public relations or the sales material written by the
Reports and management.
Press
Releases

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 Financial Statement Analysis Framework
Objective and
Define the purpose of the analysis , information presentation ,
context of the
time availability and budget.
Analysis
Gathering companys financial data and also information on the
Gather Data economy and industry to understand the environment in which
the company operates.
This involves calculation of ratios , preparing graphs ,performing
Process the data statistical analyses and preparation of common size balance
sheets.

Analyze and Interpreting the output and using the data to answer the
interpret the data questions .

Report the
Prepare the report and communicate the conclusion and
conclusions or
recommendation in the right format to the target audience.
recommendations

Changing the conclusions or recommendations when necessary

Update the Analysis
by periodically repeating the above steps.

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 Practice Questions
1. A companys current financial position would best be evaluated using the:
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
2. Accounting policies, methods, and estimates used in preparing financial
statements are most likely found in the:
A. Auditors report.
B. Management commentary.
C. Notes to the financial statements.

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 Practice Questions
3. Information about management and director compensation would least
likely be found in the:
A. Auditors report.
B. Proxy statement.
C. Notes to the financial statements.
4. What type of audit opinion is preferred when analyzing financial statements?
A. Qualified.
B. Adverse.
C. Unqualified.

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 Practice Questions
5. Which of the following items would most likely be classified as an operating
activity?
A. Issuance of debt.
B. Acquisition of a competitor.
C. Sale of automobiles by an automobile dealer.

Questions 1 2 3 4 5

Answer Key A C A C C

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