1. • Provide information about a company’s financial performance,
financial position and changes in financial position.
• Include audited financial statements
• Financial Statement Analysis uses financial reports of the
company
Study Session 7, Reading 22
2. • There are 4 basic financial statements:
- Statement of Financial Position
- Statement of Comprehensive Income
- Statement of Changes in Equity
- Statement of Cash Flows
Study Session 7, Reading 22
3. • The following equation represents relation between three
components of the Balance Sheet:
Assets = Liabilities + Owner’s Equity
Study Session 7, Reading 22
4. • The equation of the Income Statement is:
(Revenue + Other Income) – Expenses
= Income – Expenses
= Net Income
Study Session 7, Reading 22
5. • The notes to the financial statements (also called footnotes) are
an integral part of the financial statements and help users to
better understand the financial statements.
• Financial notes and supplementary schedules provide
explanatory information about almost every item in the Income
Statement and Balance Sheet.
Study Session 7, Reading 22
6. • The disclosure of notes relating to policies, methods and
estimates help analysts compare the financial statements of
different companies that follow different accounting methods,
policies and estimates.
Study Session 7, Reading 22
7. •In the management commentary section of the annual reports
of public traded companies, various issues such as nature of
business, future outlook and past results are discussed.
Study Session 7, Reading 22
8. • Financial statements of companies are required to be audited in
accordance with specific auditing standards.
• A written opinion on the financial statements by the
independent auditor is called an Audit Report.
Study Session 7, Reading 22
9. • Unqualified or clean audit opinion
• Qualified audit opinion
• Adverse opinion
• Disclaimer of opinion
Study Session 7, Reading 22
10. • While undertaking analysis, analysts also consider other
information provided by management and information from
external sources.
• Besides financial statements, notes and supplementary
information and auditor’s reports; the companies provide other
information through annual reports, press release, websites,
conference calls etc.
Study Session 7, Reading 22
12. • Explaining the purpose and context of analysis
• Explaining the purpose and context of analysis
• Processing Data
• Analysing the processed data
• Drawing & communicating conclusions
• Follow-up
Study Session 7, Reading 22
13. Classification of Business Activities
• Operating Activities
• Investing Activities
• Financing Activities
Study Session 7, Reading 23
15. • The Basic Accounting Equation that underlies the balance sheet is
Assets = Liabilities + Owner’s Equity
• The expanded accounting equation can be written as
Assets = Liabilities + Contributed Capital
Study Session 7, Reading 23
16. Accounting Equations
Owner’s Equity can be shown by the equation
Owner’s Equity = Contributed Capital + Retained Earnings
The equation of the income statement is
Net Income = Revenue – Expenses
Study Session 7, Reading 23
17. • The accounting process involves recording business transactions in
such a way that periodic financial statements can be prepared.
• Recording of business transactions in the accounting system is
done with the help of basic and expanded accounting equations.
Study Session 7, Reading 23
18. • Identifying the affected account, amount and whether there is
increase or decrease.
• Determining the element type of account affected.
• Entering the amount into the appropriate column or
spreadsheet.
• Ensuring the accounting equation is in balance.
Study Session 7, Reading 23
19. • Revenues should be recorded when earned and expenses should
be recorded when incurred irrespective of when the cash related to
the transaction received or paid.
• The purpose of accrual accounting is to ensure that revenues and
expenses are recorded in the proper accounting period.
Study Session 7, Reading 23
21. • The equation underlying retained earnings can be represented
as:
Ending Retained Earnings= Beginning Retained Earning + Net
Income – Dividends
Study Session 7, Reading 23
22. • Income Statement equation:
Assets = Liabilities + Contributed Capital + Ending Retained
Earnings
or
Assets = Liabilities + Contributed Capital + Beginning Retained
Earnings + Revenue – Expenses – Dividends
Study Session 7, Reading 23
23. • The flow of information in an accounting system involves the
following steps:
• Journal entries and adjusting entries
• General ledger and T-accounts
• Trial balance and adjusted trial balance
• Financial statements.
Study Session 7, Reading 23
24. • Financial reports that are used by analysts in security valuation,
equity analysis, and credit analysis.
Study Session 7, Reading 23
25. • Include financial statements and other supplementary
disclosures.
• Describe principles that should be used in preparing financial
reports.
Study Session 7, Reading 24
26. • To provide financial information
• Requires a company to choose from different policies and
estimates
• Try to ensure consistency in the judgements.
• Developed in accordance with a framework.
Study Session 7, Reading 24
27. • International Accounting Standard Board (IASB)
• Financial Accounting Standards Board (FASB).
• Securities and Exchange Commission (SEC)
• Financial Service Authority (FSA)
Study Session 7, Reading 24
28. • Should be clearly defined
• Should be independent and should not be under the influence of
pressure from external sources.
• Should observe high professional standards, standards of ethics,
and confidentiality.
• Should be in public interest
Study Session 7, Reading 24
29. • To protect investor’s interests, ensuring transparency and
efficiency in markets and reducing systematic risk.
• To ensure uniform regulation across world markets.
Study Session 7, Reading 24
30. • The IASB, FASB and other standard setters are trying to achieve
convergence of financial reporting standards across the globe.
• With the efforts to move towards global convergence,
challenges to the convergence are also becoming apparent.
Study Session 7, Reading 24
31. • Differences in institutional, regulatory, cultural and the
business environment,
• Changes.
• political pressure
• Enforcement is not uniform and standards are not applied
consistently
Study Session 7, Reading 24
32. • The conceptual framework is helpful in:
–Assisting standard setters
–Guiding preparers
–Helping auditors
–Assisting analysts
Study Session 7, Reading 24
35. • Statement of Financial Position
• Single Statement of Comprehensive Income or two statements
• Statement of Changes in Equity
• Statement of Cash Flows
Study Session 7, Reading 22
36. • Assets and liabilities should be classified as either current and
non-current.
• There should be specific disclosures in the notes about the
information provided in the financial statements.
Study Session 7, Reading 24
37. • Companies use either IFRS or US GAAP standard when
preparing financial reports.
• Though these two systems of standards are converging, there
still remains difference regarding the framework and general
reporting requirements.
Study Session 7, Reading 24
38. • There should be full disclosure
• Should be comprehensive
• should have consistency
Study Session 7, Reading 24
39. • Various bases for measuring the value of assets and liabilities.
• Establishing financial reporting standards based on different
approaches.
• Difficulty in establishing financial reporting standards .
Study Session 7, Reading 24
40. • Though there has been advancement towards global
convergence of financial reporting system, there are significant
differences in financial reporting system in global capital
markets.
Study Session 7, Reading 24
41. • An analyst has to monitor the following three areas:
–new products or transactions.
–actions of standard setters and other groups representing
users of financial statements.
–disclosure of accounting policies and estimates by
companies.
Study Session 7, Reading 24
42. • In the notes to the financial statements and accompanying
discussion, companies provide information about accounting
policies and estimates.
• The policies that management deems important are discussed
in management commentary.
Study Session 7, Reading 24
43. • Changes in accounting policies may be driven by changes in
some accounting standards or by the company voluntarily
changing the policy.
Study Session 7, Reading 24
