This document provides an introduction to financial statement analysis. It discusses the key roles of financial reporting and analysis. The four primary financial statements are covered: the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows. Additional items like notes, management discussion and analysis, audits, and other sources of information are also summarized. The document concludes with an overview of the financial statement analysis framework.
This document provides an introduction to financial statement analysis. It discusses the key roles of financial reporting and analysis. The four primary financial statements are covered: the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows. Additional items like notes, management discussion and analysis, audits, and other sources of information are also summarized. The document concludes with an overview of the financial statement analysis framework.
This document provides an introduction to financial statement analysis. It discusses the key roles of financial reporting and analysis. The four primary financial statements are covered: the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows. Additional items like notes, management discussion and analysis, audits, and other sources of information are also summarized. The document concludes with an overview of the financial statement analysis framework.
This document provides an introduction to financial statement analysis. It discusses the key roles of financial reporting and analysis. The four primary financial statements are covered: the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows. Additional items like notes, management discussion and analysis, audits, and other sources of information are also summarized. The document concludes with an overview of the financial statement analysis framework.
Bondholders Shareholders Financial Statement Analysis Practice Question The role of financial reporting is most likely:
A. To help users in making forecasts about the future performance of the company B. To provide information that is useful to a wide range of users in making economic decisions C. To provide historical trends about the company’s performance Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity
Statement of Retained Earnings
Net Income or Dividends
Loss Paid
Capital Transactions with
Shareholders
Beginning Balance + Changes = Ending Balance
Statement of Changes in Cash Flow
Cash Can Flow In or Out in Three Areas:
Operating Investing Activities Activities
Financing Activities
Reconciles Cash Balance at Beginning of Period with Cash
Balance at End of Period Practice Question A financial analyst would most likely use the income statement to:
A. Evaluate the financial performance of firm over a period of time
B. Analyze the financial position of a firm at a certain point in time C. Compute cash inflows and outflows generated by a firm Practice Question An analyst with a national ratings agency is concerned about a firm’s ability to meet its short-term obligations. To evaluate the firm’s liquidity, the analyst would most likely refer to the:
A. Balance sheet B. Income statement C. Cash flow statement Practice Question A research analyst is evaluating the financial statements of Tripod Photo Company (TPC). The analyst intends to make a recommendation on the stock after careful scrutiny of TPC’s financial statements. The analyst observes that TPC initiated a dividend payment exactly two years ago and believes its operating cash flows appear to be able to support an even higher dividend payment next year.
The sustainability of dividends is most likely to be evaluated using the:
A. Balance sheet B. Income statement C. Statement of cash flows Notes and Supplementary Information
Provides Information Essential to Understanding the Primary
Financial Statements
Discloses the Basis for the Construction of the Primary Financial
Statements
Accounting Methods Estimates Policies Management Discussion and Analysis (MD&A)
Managers Commentary
Operational The Nature of Performance
Results the Business Measures
Management’s Firm’s Resources,
Objectives and Risks, and Strategies Relationships Practice Question A financial analyst reads the managerial discussion of a large retail firm. The least likely topic appearing in the footnotes is:
A. A discussion on the recent expansion of operations to Canada
B. The risk associated with the firm’s outstanding long-term debt issues C. An explanation for the granting of executive stock options to a newly hired chief operating officer Audits
Examination of financial statements by an independent third party
Objective is to provide reasonable assurance that statements are
free of material error
Opinions
Unqualified Qualified Adverse Disclaimer
Internal Controls
Company procedures to ensure
reliable preparation of financial statements Practice Question An audit is most likely described as:
A. A review of the financial statements by an internal auditor of the entity to check their accuracy B. An independent review of an entity’s financial statements C. A review of the financial statements by a senior director of the entity with the purpose of stating an opinion on their fairness and reliability Practice Question If an auditor feels that a company’s financial statements are not presented fairly or significantly deviate from accounting standards, she will most likely issue a(n):
A. Qualified opinion B. Unqualified opinion C. Adverse opinion Press Interim Releases Reports
Other Sources of Proxy
Websites Information Statements
Peer Technical Analysis Specialists Practice Question Which of the following is most accurate?
A. All information needed for financial statement analysis can be found in the audited statements. B. Thorough financial statement analysis must include sources beyond annual statements and supplementary information. C. Annual financial statements and supplementary information are sufficient to thoroughly analyze a company. Practice Question A research analyst with a large investment firm is evaluating the financial statements of Sunny Lumber Company (SLC). The analyst intends to make a recommendation on the stock after careful scrutiny of SLC’s financial statements and other publicly available information. The analyst makes the following comment during his research: Comment: SLC’s profitability is far superior to that of its three main competitors.
The comment is most likely made after evaluating the:
A. Balance sheet and the income statement
B. Statement of cash flows and the proxy statement C. Income statement and external financial data sources Financial Statement Analysis Framework Practice Question An analyst produces a table of financial ratios on liquidity and profitability for a healthcare firm. The most likely phase of the financial statement analysis framework is:
A. Analyzing data B. Processing data C. Collecting data Practice Question A junior research analyst with a commercial bank is evaluating the financial statements of Troy Technology Company (TTC). The analyst intends to make a recommendation on the stock after completing the steps of the financial statement analysis framework. The analyst notes that TTC’s liquidity and capital structure ratios are consistent with the industry averages.
The conclusion regarding liquidity and capital structure ratios is most likely made during the:
A. Analyzing B. Collecting C. Processing Practice Workbook 1 Financial Statements and Management Commentary Description Primary Location Management Commentary
The firm’s capital structure
Earnings per share
Gross margin as % of revenue
Planned expansion of domestic facility
Planned global expansion
Sale of business segment
Practice Workbook 1 Financial Statements and Management Commentary Description Primary Location Management Commentary
The firm’s capital structure Balance Sheet
Earnings per share Income Statement
Gross margin as % of revenue Income Statement
Planned expansion of None domestic facility
Planned global expansion None
Income Statement and
Sale of business segment Cash Flow Statement Practice Workbook 1 Financial Statements and Management Commentary Description Primary Location Management Commentary
The firm’s capital structure Balance Sheet Credit risk of the bond issue
Earnings per share Income Statement Result of operations
Critical performance Gross margin as % of revenue Income Statement measures Planned expansion of None Management strategies domestic facility
Planned global expansion None Currency risk
Income Statement and
Sale of business segment Company resources Cash Flow Statement Practice Workbook 2 Financial Statement Analysis Framework Activity Completed in Phase Define audience for finished report Read and evaluate financial data Project earnings for upcoming quarter Evaluate skill of executives Complete periodic review to confirm decision was appropriate Gather historical dividend yields Practice Workbook 2 Financial Statement Analysis Framework Activity Completed in Phase Define audience for finished report Articulate purpose of analysis Read and evaluate financial data Process data Project earnings for upcoming quarter Develop conclusions Evaluate skill of executives Interpret processed data Complete periodic review to confirm decision was appropriate Follow up
Gather historical dividend yields Collect data
Practice Questions with Solutions Practice Question and Solution The role of financial reporting is most likely:
A. To help users in making forecasts about the future performance of the company B. To provide information that is useful to a wide range of users in making economic decisions C. To provide historical trends about the company’s performance
LOS 19a Correct Answer: B
The critical role of financial reporting is to inform. A wide range of users rely on this information to make important economic decisions. Users make forecasts and attempt to locate trends using this information, but those are not part of the roles of financial reporting. Practice Question and Solution A financial analyst would most likely use the income statement to:
A. Evaluate the financial performance of firm over a period of time
B. Analyze the financial position of a firm at a certain point in time C. Compute cash inflows and outflows generated by a firm
LOS 19b Correct Answer: A
Financial performance refers to the ability of a firm to generate a profit. One of the main roles of the income statement is to show a firm’s profitability. Practice Question and Solution An analyst with a national ratings agency is concerned about a firm’s ability to meet its short-term obligations. To evaluate the firm’s liquidity, the analyst would most likely refer to the:
A. Balance sheet B. Income statement C. Cash flow statement
LOS 19b Correct Answer: A
The balance sheet shows the firm’s short-term assets and its short-term liabilities. The analyst would evaluate the relationship between those two accounts to determine the firm’s liquidity. Practice Question and Solution A research analyst is evaluating the financial statements of Tripod Photo Company (TPC). The analyst intends to make a recommendation on the stock after careful scrutiny of TPC’s financial statements. The analyst observes that TPC initiated a dividend payment exactly two years ago and believes its operating cash flows appear to be able to support an even higher dividend payment next year.
The sustainability of dividends is most likely to be evaluated using the:
A. Balance sheet B. Income statement C. Statement of cash flows
Los 19b Correct Answer: C
The statement of cash flows will show current dividend payments together with operating cash flows. The analyst could make a reasonable sustainability comment using this statement. Practice Question and Solution A financial analyst reads the managerial discussion of a large retail firm. The least likely topic appearing in the footnotes is:
A. A discussion on the recent expansion of operations to Canada
B. The risk associated with the firm’s outstanding long-term debt issues C. An explanation for the granting of executive stock options to a newly hired chief operating officer
LOS 19c Correct Answer C
Managers typically do not express opinions on compensation issues, which would be contained in the footnotes under accounting policies or methods. Practice Question and Solution An audit is most likely described as:
A. A review of the financial statements by an internal auditor of the entity to check their accuracy B. An independent review of an entity’s financial statements C. A review of the financial statements by a senior director of the entity with the purpose of stating an opinion on their fairness and reliability
LOS 19d Correct Answer: B
Neither internal auditors nor senior directors are independent and are not a part of the audit. Practice Question and Solution If an auditor feels that a company’s financial statements are not presented fairly or significantly deviate from accounting standards, she will most likely issue a(n):
A. Qualified opinion B. Unqualified opinion C. Adverse opinion
LOS 19d Correct Answer: C
When the auditing firm believes there is a significant deviation from accepted accounting standards, it will offer an adverse opinion. Practice Question and Solution Which of the following is most accurate?
A. All information needed for financial statement analysis can be found in the audited statements. B. Thorough financial statement analysis must include sources beyond annual statements and supplementary information. C. Annual financial statements and supplementary information are sufficient to thoroughly analyze a company.
LOS 19e Correct Answer: B
Analysts should never rely solely on the audited financial statements or the supplementary information. They should locate any relevant information that is reliable and use it as part of their analysis. Practice Question and Solution A research analyst with a large investment firm is evaluating the financial statements of Sunny Lumber Company (SLC). The analyst intends to make a recommendation on the stock after careful scrutiny of SLC’s financial statements and other publicly available information. The analyst makes the following comment during his research: Comment: SLC’s profitability is far superior to that of its three main competitors.
The comment is most likely made after evaluating the:
A. Balance sheet and the income statement
B. Statement of cash flows and the proxy statement C. Income statement and external financial data sources
LOS 19b, 19e
Correct Answer: C
Profitability is found at the bottom of the income statement, and industry averages are found on the competitor websites or other sources of competitor’s financial information. Practice Question and Solution An analyst produces a table of financial ratios on liquidity and profitability for a healthcare firm. The most likely phase of the financial statement analysis framework is:
A. Analyzing data B. Processing data C. Collecting data
LOS 19f Correct Answer: B
Processing data includes the creation of financial tables on liquidity and profitability. Practice Question and Solution A junior research analyst with a commercial bank is evaluating the financial statements of Troy Technology Company (TTC). The analyst intends to make a recommendation on the stock after completing the steps of the financial statement analysis framework. The analyst notes that TTC’s liquidity and capital structure ratios are consistent with the industry averages.
The conclusion regarding liquidity and capital structure ratios is most likely made during the:
A. Analyzing B. Collecting C. Processing
LOS 19f Correct Answer: A
Analyzing data includes interpreting liquidity and capital structure ratios and comparing them to industry averages.
