Introduction to Financial Statement Analysis quiz

Interim reports are provided semi-annually or quarterly, depending on applicable regulatory requirements.

(are audited) is incorrect. Interim reports are not audited.

(include a full set of financial statements and notes) is incorrect. Interim reports generally present the four basic financial statements and condensed notes.

 A qualified audit opinion is one in which there is some scope limitation or exception to accounting standards. Exceptions are described in the audit report with additional explanatory paragraphs so that the analyst can determine the importance of the exception.

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.

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 .

The statements that the financial information was prepared according to GAAP should beincluded in the regular part of the auditors' report and not as an explanatory paragraph.The other information would be contained in explanatory paragraphs added to theauditors' report.

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.

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 .

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.

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.

The balance sheet represents information at a specific point in time. The income  statement represents information over a period of time .

Financial statement analysis refers to the use of information from a company's financial statements along with other information to make economic decisions regarding that company. Financial reporting refers to the reports and presentations that a company uses to show its financial performance to investors, creditors, and other interested parties. Financial reporting is a requirement for companies that are listed on public exchanges .

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 .

 

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.

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 .

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 notes disclose choices in accounting policies, methods, and estimates .

Auditors make an independent review of financial statements, which are prepared bycompany management and are management's responsibility. It is the responsibility ofauditors to confirm the assets, liabilities, and other items included in the statements andthen issue an opinion concerning their fairness and reliability.

When performing financial statement analysis, analysts should review all company sources of information as well as information from external sources regarding the economy, the industry, the company, and peer (comparable) companies .

The role of financial reporting is to provide information about the performance of a company, its financial position, and changes in financial position that is useful to a wide range of users in making economic decisions.

(the audit report) is incorrect. Audit reports express an opinion about the fair presentation of the financial statements.

(financial statement analysis) is incorrect. The role of financial statement analysis is to take the financial reports and evaluate the past, current, and prospective performance and financial position of a company for the purpose of making investment, credit, and other economic decisions .

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.

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 .

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.

The financial statement analysis framework consists of six steps :

1. State the objective and context. Determine what questions the analysis is meant toanswer, the form in which it needs to be presented, and what resources and howmuch time are available to perform the analysis.

2. Gather data. Acquire the company's financial statements and other relevant data onits industry and the economy. Ask questions of the company's management,suppliers, and customers, and visit company sites.

3. Process the data. Make any appropriate adjustments to the financial statements.Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets.

4. Analyze and interpret the data. Use the data to answer the questions stated in thefirst step. Decide what conclusions or recommendations the information supports.

5. Report the conclusions or recommendations. Prepare a report and communicate itto its intended audience. Be sure the report and its dissemination comply with theCode and Standards that relate to investment analysis and recommendations.

6. Update the analysis. Repeat these steps periodically and change the conclusions orrecommendations when necessary.

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.

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) .

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 .

Discussion of a firm's past performance and future outlook is most likely to be found inmanagement's commentary.

The basic components of owners’ equity are paid-in capital and retained earnings. In the paid-in capital account, an example of an increase in owners’ equity is a new equity issuance. Cash dividends reduce retained earnings and owners’ equity. Share repurchases reduce paid-in capital and owners’ equity.

(Share repurchase ) is incorrect because for the paid-in capital account an example of a decrease in owners’ equity is the repurchase of previously issued shares.

(Cash dividend) is incorrect because a cash dividend payment is the most common cause of a decrease in owners’ equity.

In general, analysts seek to examine the past and current performance and financial position of a company in order to form expectations about its future performance and financial position.

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.