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 .

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.

The statement of cash flows describes a firm's inflows and outflows of cash during areporting period from operating, investing, and financing activities. Financing transactionssuch as issuance of debt or stock are shown on the statement of cash flows. Thestatement of financial position (balance sheet) presents the firm's assets, liabilities, andequity at a point in time. The statement of comprehensive income (income statement)does not directly reflect a firm's financing transactions. Cash  raised is not included in afirm's revenues and dividends paid and debt principal repaid are not included in itsexpenses .

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 .

Determining the suitability of an investment for a client is not one of the six steps in the Financial statement analysis framework. The analyst would only perform this function if he also had an advisory relationship with the client. Stating the objective and processing the data are two of the six steps in the framework. The others are gathering the data, analyzing the data, updating the analysis, and reporting the conclusions .

Interim reports, either quarterly or semi-annual, contain updated information on a company’s performance and financial position since the last annual report.

(management discussion and analysis) is incorrect. The MD&A is part of the annual report and is not an update since the last annual report .

(proxy statements) is incorrect. Proxy statements contain information about matters that will be put to a vote at shareholders’ meetings .

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.

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 .

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

The follow-up phase involves gathering information and repeating the analysis to determine whether it is necessary to update reports and recommendations.

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

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 .

For a publicly traded firm in the United States, the auditor must express an opinion as to whether the company’s internal control system is in accordance with the Public Accounting Oversight Board, under the Sarbanes–Oxley Act. The opinion is given either in a final paragraph in the auditor’s report or as a separate opinion.

(state that the financial statements are prepared according to generally accepted accounting principles) is incorrect. The statements are those prepared by management, not the auditor. The auditor is expressing an opinion as to whether the statements are fairly presented and free from material error.

(ensure that the financial statements are free from error, fraud, or illegal acts) is incorrect. The auditor only provides reasonable assurance that the statements are free from material error.

 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.

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.

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.

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.

Financial reporting refers to the way companies show their financial performance toinvestors, creditors, and other interested parties by preparing and presenting financialstatements. The objective of financial statements, not analysis, is to provide informationabout the financial position, performance and changes in financial position of an entitythat is useful to a wide range of users in making economic decisions. The role of financialstatement analysis, not reporting, is to use the information in a company's financialstatements, along with other relevant information, to assess a company's pastperformance in order to draw conclusions about the company's ability to generate cashand profits in the future.

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 .

Owners’ equity is the owners’ residual interest in (i.e., residual claim on) the company’s assets after deducting its liabilities, which is information presented on the balance sheet .

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

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.

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.

Revenues for a reporting period are presented on a company's income statement. They can be, but are not required to be, classified as operating and nonoperating revenues. Cash from operating activities is presented on the company's statement of cash flows, but this is not necessarily equal to operating revenues because revenue might be recognized in a different period than cash is collected. The balance sheet displays a company's financial position at a fixed point in 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 independent audit report provides reasonable assurance that the financial statements are fairly presented, meaning that there is a high probability that the audited financial statements are free from material error, fraud, or illegal acts that have a direct effect on the financial statements.

The notes provide information that is essential to understanding the information provided in the primary statements.

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

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) .

auditor will issue a qualified opinion if the financial statements make any exceptions to applicable accounting standards and will explain the effect of these exceptions in the auditor’s report .