International Financial Statement Analysis Workbook. Elaine Henry

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СКАЧАТЬ items that change owners' equity except transactions with owners. Some of these items are included as part of net income, and some are reported as other comprehensive income (OCI).

      ● The statement of changes in equity provides information about increases or decreases in the various components of owners' equity.

      ● Although the income statement and balance sheet provide measures of a company's success, cash and cash flow are also vital to a company's long-term success. Disclosing the sources and uses of cash helps creditors, investors, and other statement users evaluate the company's liquidity, solvency, and financial flexibility.

      ● The notes (also referred to as footnotes) that accompany the financial statements are an integral part of those statements and provide information that is essential to understanding the statements. Analysts should evaluate note disclosures regarding the use of alternative accounting methods, estimates, and assumptions.

      ● In addition to the financial statements, a company provides other sources of information that are useful to the financial analyst. As part of his or her analysis, the financial analyst should read and assess this additional information, particularly that presented in the management commentary (also called management report[ing], operating and financial review, and management's discussion and analysis [MD&A]).

      ● A publicly traded company must have an independent audit performed on its annual financial statements. The auditor's report expresses an opinion on the financial statements and provides some assurance about whether the financial statements fairly present a company's financial position, performance, and cash flows. In addition, for US publicly traded companies, auditors must also express an opinion on the company's internal control systems.

      ● Information on the economy, industry, and peer companies is useful in putting the company's financial performance and position in perspective and in assessing the company's future. In most cases, information from sources apart from the company are crucial to an analyst's effectiveness.

      ● The financial statement analysis framework provides steps that can be followed in any financial statement analysis project. These steps are:

      ● articulate the purpose and context of the analysis;

      ● collect input data;

      ● process data;

      ● analyze/interpret the processed data;

      ● develop and communicate conclusions and recommendations; and

      ● follow up.

      PROBLEMS

      1. Providing information about the performance and financial position of companies so that users can make economic decisions best describes the role of:

      A. auditing.

      B. financial reporting.

      C. financial statement analysis.

      2. A company's current financial position would best be evaluated using the:

      A. balance sheet.

      B. income statement.

      C. statement of cash flows.

      3. A company's profitability for a period would best be evaluated using the:

      A. balance sheet.

      B. income statement.

      C. statement of cash flows.

      4. Accounting policies, methods, and estimates used in preparing financial statements are most likely found in the:

      A. auditor's report.

      B. management commentary.

      C. notes to the financial statements.

      5. Information about management and director compensation would least likely be found in the:

      A. auditor's report.

      B. proxy statement.

      C. notes to the financial statements.

      6. Information about a company's objectives, strategies, and significant risks would most likely be found in the:

      A. auditor's report.

      B. management commentary.

      C. notes to the financial statements.

      7. What type of audit opinion is preferred when analyzing financial statements?

      A. Qualified.

      B. Adverse.

      C. Unqualified.

      8. Ratios are an input into which step in the financial statement analysis framework?

      A. Process data.

      B. Collect input data.

      C. Analyze/interpret the processed data.

      CHAPTER 2

      FINANCIAL REPORTING MECHANICS

      LEARNING OUTCOMES

      After completing this chapter, you will be able to do the following:

      ● explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements;

      ● explain the accounting equation in its basic and expanded forms;

      ● describe the process of recording business transactions using an accounting system based on the accounting equation;

      ● describe the need for accruals and other adjustments in preparing financial statements;

      ● describe the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners' equity;

      ● describe the flow of information in an accounting system;

      ● describe the use of the results of the accounting process in security analysis.

      SUMMARY OVERVIEW

      ● Business activities can be classified into three groups: operating activities, investing activities, and financing activities.

      ● Companies classify transactions into common accounts that are components of the five financial statement elements: assets, liabilities, equity, revenue, and expense.

      ● The core of the accounting process is the basic accounting equation: Assets = Liabilities + Owners' equity.

      ● The expanded accounting equation is Assets = Liabilities + Contributed capital + Beginning retained earnings + Revenue – Expenses – Dividends.

      ● Business transactions are recorded in an accounting system that is based on the basic and expanded accounting equations.

      ● СКАЧАТЬ