FRA-1-Financial Statement Analysis An Introduction

Financial Statement
Analysis – An Introduction
Role of Financial Reporting and FSA
The role of Financial Reporting is to provide information about a
company’s financial position and performance which can be used by
external and internal parties related to the company.
The role of Financial Statement Analysis is to use these financial
statements to judge the past present and prospective financial position
from the purpose of making investments and other financial decisions.
Financial statement users
Short term creditors Long term creditors Are

Equity investors are are interested in always concerned in
interested in company’s company’s liquidity the company’s earning
long term growth because they always power and long term
want an early payback assets .
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Role of FRA
Performance
(Profitability, Cash Flow)
Forecast
Evaluate
Past & Future
Present
Financial Position
 Financial reports provide information about companies’ performance, financial

position, changes in financial position
 Purpose of analysis: making investment, credit, economic decisions
Role of Key Financial Statements
Key financial statements
 Income statements
 Balance sheet
 Cash flow statement
 Statement of changes in
owner’s equity
Supplementary information
 Footnotes
 Management discussion & analysis
 External auditor’s report
Role of the Income Statement
 Presents financial performance
 Also called “statement of operations” and “profit and loss statement”
 Basic Philospophy
Net Income = Revenues - Expenses
Role of the Balance Sheet
 Presents financial position of company
 Also called “statement of financial position”
 Basic Philosophy
Assets – Liabilities = Owner’s equity
Role of the Cash Flow Statement
Presents the sources and uses of cash
Three activities for Cash Transactions

 Operating: the day-to-day transactions that determine net income
 Investing: activities related to acquisition and disposal of long-term assets
 Financing: activities related to obtaining or repaying capital
Role of Changes in Owner’s Equity
 Presents the changes in equity

 Also called “statement of shareholder’s equity” and “statement of
retained earnings”
 It reports the amounts and sources of changes in equity from capital
transactions with owners.
 It reports ownership interests in order of preference upon liquidation
and dividends.
Financial Statement Notes and Supplementary Schedules
Financial Foot notes provide information about the accounting methods,

assumptions and estimates used by the management to develop the data
reported in the financial statements.
 Additional disclosure is provided in areas such as income taxes
inventory methods , fixed assets , debt , pensions.
Supplementary Schedules provide additional information about
company’s assets and liabilities as supplementary data outside the
financial statements.
 Examples of such disclosures include :
 Operating income or sales by region or business segment
 Oil and gas reserves reported by the oil and gas companies.
 Impact of changing prices , sales revenue.
Management ‘s Discussion and Analysis (MD&A)
Requires the management to assess the company’s current financial

condition , liquidity and planned capital expenditure for the next year.
 For publicly held companies in the United States the MD&A is
required to discuss results from operations, discussion of trends in
sales and expenses ,capital resources and liquidity and a general
business overview based on known trends.
 The MD&A section is not audited and it is for public companies only.
Objectives of Audits of Financial Statements and
Auditor’s Reports
An Audit is an independent review of an entity’s financial statements
 The objectivity revolves around the fairness and reliability of the
financial statements.
The Auditor is responsible for seeing that the financial statements
issued comply with the Generally Accepted Accounting
Principles(GAAP).
 The Auditor examines the company’s accounting and internal
control systems.
 Auditors are supposed to be independent though they are hired by
the government.
Types of Audit Reports
Unqualified Opinion Report:
Qualified Opinion Report :
Company’s financial condition ,
It is issued when there are situations
position are fairly presented in the
which are exceptions to the accounting
financial statements. It is in accordance
principles like(GAAP).
with GAAP and free of misstatements.
Audit Reports
Adverse Opinion Report : Disclaimer of Opinion : It is issued

when an auditor tried to audit a
It is issued when statements are not company but could not complete due
presented fairly or when they do not to various reasons and does not issue
comply with the accounting standards. an opinion.
Other Sources Of Information Used by Analysts
• These reports are generally unaudited .
• Publicly held companies must file form 10-Q(Interim Report) on a
Interim quarterly basis.
Reports
• It contains information regarding compensation , management

Qualifications and stock options.
Proxy • These are issued to the shareholders and are filed with the SEC.
Statements
Corporate • These are the public relations or the sales material written by the
Reports and management.
Press
Releases
Financial Statement Analysis Framework
Objective and
• Define the purpose of the analysis , information presentation ,
context of the
time availability and budget.
Analysis
• Gathering company’s financial data and also information on the
Gather Data economy and industry to understand the environment in which
the company operates.
• This involves calculation of ratios , preparing graphs ,performing
Process the data statistical analyses and preparation of common size balance
sheets.
Analyze and • Interpreting the output and using the data to answer the
interpret the data questions .
Report the
• Prepare the report and communicate the conclusion and
conclusions or
recommendation in the right format to the target audience.
recommendations
• Changing the conclusions or recommendations when necessary

Update the Analysis
by periodically repeating the above steps.

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Financial Statement

Financial statement users

Short term creditors Long term creditors Are

 Financial reports provide information about companies’ performance, financial

 Presents financial performance

 Also called “statement of operations” and “profit and loss statement”

Net Income = Revenues - Expenses

 Presents financial position of company

 Also called “statement of financial position”

Assets – Liabilities = Owner’s equity

Three activities for Cash Transactions

 Presents the changes in equity

Financial Foot notes provide information about the accounting methods,

Requires the management to assess the company’s current financial

Adverse Opinion Report : Disclaimer of Opinion : It is issued

• It contains information regarding compensation , management

• Changing the conclusions or recommendations when necessary

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