Introduction to Financial Statement Analysis quiz

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.

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.

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 .

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

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.

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 .

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 :

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.

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.

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.

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

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 .

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.

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 .

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 .

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 .

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 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.

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.

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.

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.

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.

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 .

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.

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.

Proxy statements contain information related to matters that come before shareholders for a vote, such as elections of board members .

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

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