Introduction to Financial Statement Analysis quiz

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 .

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 .

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 .

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.

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

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.

 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.

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 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 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 .

 

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 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 .

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 .

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.

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.

Preparing common-size financial statements is part of the process data step.

(Collect data) is incorrect. The financial statements are obtained in the collect data step, but not converted into common-size statements until the process step.

(Analyze/interpret data) is incorrect. Preparing common-size financial statements is part of the process data stage, after which the analyst will analyze/interpret the processed data.

The standard auditor's report contains three parts :

1. The financial statements are prepared by management and are their responsibilityand the auditor has performed an independent review.
2. The audit was conducted using generally accepted auditing standards, whichprovides reasonable assurance that there are no material errors in the financial statements .
3. The auditor is satisfied the statements were prepared in accordance with acceptedaccounting principles, and the principles chosen and estimates are reasonable .

Under U.S. GAAP, the auditor is required to state an opinion on the company's internalcontrols. The auditor may add this opinion as a fourth element of the auditor's report orprovide it separately .

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 .

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

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 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.

Financial reporting refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements, including information about changes in a company's financial position. The role of financial statement analysis is to use the information in a company's financial statements, along with other relevant information, to make economic decisions, such as whether to invest in the company's securities or recommend them to other investors. Analysts use financial statement data to evaluate a company's past performance and current financial position in order to form opinions about the company's ability to earn profits and generate cash flow in the future .

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 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.

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) .

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 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.

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

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.