Introduction to Financial Statement Analysis quiz

This statement describes the role of an auditor, rather than the role of an analyst. The other responses describe the role of financial statement analysis .

This is the role of financial reporting. The role of financial statement analysis is to evaluate the financial reports.

To be in compliance with Sarbanes–Oxley, it is mandatory that management’s Report to Shareholders discuss internal financial controls and their effectiveness, as well as the company’s auditor’s opinion of these internal controls.

(The suitability of management and director compensation agreements) is incorrect. Information on management and director compensation agreements will be found in the proxy statement and/or notes to the financial statements.

(The accuracy of estimates and assumptions used in preparing the financial statements) is incorrect. Estimates and assumptions used in preparing financial statements are found in the notes to the financial statements.

The financial statement analysis framework consists of six steps :

1. State the objective and context.
2. Gather data.
3. Process the data.
4. Analyze and interpret the data.
5. Report the conclusions or recommendations.
6. Update the analysis.

IFRS recommends that management commentary address the company's keyrelationships, resources, and risks, as well as the nature of the business, management's
objectives, the company's past performance, and the performance measures used.Securities regulators may impose requirements for publicly traded firms to address
certain topics in management's commentary, but accounting standards do not .

Profitability is the performance aspect measured by the income statement. The balance sheet portrays the financial position. The statement of cash flows presents a different aspect of performance.

Interim reports are typically provided semiannually or quarterly and present the four basic financial statements and condensed notes. They are not audited. Unqualified is a type of audit opinion .

Information about accounting methods and estimates is contained in the footnotes to the financial statements .

The balance sheet reports a company’s Financial position as of a specific date. The income statement, cash flow statement, and statement of changes in owners’ equity show the company’s performance during a specific period .

The balance sheet reports a company's financial position at a point in time. In contrast, theincome statement and the cash flow statement report a company's financial performanceover a reporting period .

The financial statement analysis framework consists of six steps. Step 2: "Gather data"includes acquiring the company's financial statements and other relevant data on itsindustry and the economy. Step 3. "Process the data" includes activities such as makingany appropriate adjustments to the financial statements and preparing exhibits such asgraphs and common-size balance sheets.

Corporate reports and press releases are written by management and are often viewed aspublic relations or sales materials. An analyst should review information on the economyand the company's industry and compare the company to its competitors. Thisinformation can be acquired from sources such as trade journals, statistical reportingservices, and government agencies. Securities and Exchange Commission (SEC) filingsinclude Form 8-K, which a company must file to report events such as acquisitions anddisposals of major assets or changes in its management or corporate governance andproxy statements, which are a good source of information about the election of (andqualifications of) board members, compensation, management qualifications, and theissuance of stock options.

Management's perspective on the company's results is provided in the Management's Discussion and Analysis supplement to the financial statements. Financial statement notes (footnotes) provide information about matters such as the company's accounting methods and assumptions, contingencies, and acquisitions and disposals. Footnotes to the financial statements are audited .

Assessment of performance includes analysis of profitability and cash flow generating ability. The relationship between assets and liabilities is used to assess a company’s financial position, not its performance.

(profitability) is incorrect. Assessment of performance includes analysis of profitability.

(cash flow generating ability) is incorrect. Assessment of performance includes analysis of cash flow generating ability.

A company’s revenues and expenses are presented on the income statement, which is used to evaluate a company’s financial results (or profitability) from business activities over a period of time. A company’s financial position is best evaluated by using the balance sheet. A company’s sources of cash flow are best evaluated using the cash flow statement.

The role of financial statement analysis is to use the information in a company's financialstatements, along with other relevant information, to make economic decisions. Examplesof such decisions include whether to invest in the company's securities or recommendthem to other investors, or whether to extend trade or bank credit to the company.Although the financial statements might provide indirect evidence about the managementskill of the company's executives, that is  not generally considered the role of financialstatement analysis .

Information about management and director compensation is not found in the auditor’s report. Disclosure of management compensation is required in the proxy statement, and some aspects of management compensation are disclosed in the notes to the financial statements.

The notes disclose information about the accounting policies, methods, and estimates used to prepare the financial statements.

(a discussion of significant trends, events, and uncertainties that affect the operating results) is incorrect. The management commentary (or MDA), which is not part of the notes to financial statements, includes a discussion of significant trends, events, and uncertainties that affect the operating results.

(an auditor’s opinion as to the fair presentation of the financial statements) is incorrect. The Auditor’s Report, which is not part of the notes to financial statements, includes the auditor’s opinion as to the fair presentation of the financial statements.

These are components of management commentary.

The footnotes are an integral part of the audited financial statements in a firm's annual report and are included in the audit opinion .

 A company’s profitability is best evaluated using the income statement. The income statement presents information on the financial results of a company’s business activities over a period of time by communicating how much revenue was generated and the expenses incurred to generate that revenue .

Companies should disclose in management commentary any critical accounting policies that require management to make subjective judgements that may have a significant impact on reported financial results. These subjective judgements should be carefully reviewed because they may materially alter an analyst’s conclusions about the future performance or financial position of a company

(future revenue projections must be disclosed) is incorrect because companies are not required to disclose future revenue projections in the management’s discussion and analysis section of financial statements, but should highlight any favorable or unfavorable trends or uncertainties that may impact future performance or financial position.

(management commentary is typically unaudited) is incorrect because although management commentary is typically unaudited, it is not a reason why management commentary is of importance to analysts. Rather, analysts should be aware that management commentary is unaudited and interpret accordingly.

The primary role of financial statement analysis is to use financial reports prepared by companies to evaluate their past, current, and potential performance and financial position for the purpose of making investment, credit, and other economic decisions.

Proxy statements are issued to shareholders when there are matters that require ashareholder vote. These statements, which are also filed with the SEC and available fromEDGAR, are a good source of information about the election of (and qualifications of)board members, compensation, management qualifications, and the issuance of stockoptions.

Ratios are an output of the process data step but are an input into the analyze/interpret data step .

Weak internal controls provide an opportunity for low-quality or even fraudulent financialreporting. A firm's management, not its board of directors, is responsible for ensuring theeffectiveness of a firm's internal controls. Under U.S. GAAP, auditors are required to statean opinion on a firm's internal controls.

The balance sheet portrays the company’s financial position on a specified date. The income statement and statement of cash flows present different aspects of performance during the period.

An unqualified opinion is a “clean” opinion and indicates that the financial statements present the company’s performance and financial position fairly in accordance with a specified set of accounting standards .

For publicly traded U.S. firms, the MD&A portion of the financial disclosure is required todiscuss results of operations, capital resources and liquidity and a general businessoverview based on known trends. A discussion of unusual or infrequent items may beincluded in the MD&A, but is not required .

Securities and Exchange Commission (SEC) filings are available from EDGAR (ElectronicData Gathering, Analysis, and Retrieval System, www.sec.gov). Companies' annual andquarterly financial statements are also filed with the SEC (Form 10-K and Form 10-Q,respectively) .