Financial Statement Analysis

Roles
1. Of reporting F.S.
  1. To help users make economic decisions, they provide info about
    1. Performance
    2. Financial position
    3. Change in financial position
2. of Analysis of F.S.
  1. Evaluate company's future from its past and current position to
    1. For external users
      1. Make investments and credit decisions
    2. For internal users
      1. Make operating, investing and financial decisions
Reports
1. Made up of:
  1. Financial Statements
    1. Records that summarize accounting info
    2. Types
      1. Balance Sheet
        Discloses
        Financial position
        Company's ability to meet its obligations in the
        Short-term
        Liquidity
        Long-term
        Solvency
        Accounting equation
        Assets= liability + equity
      2. Income Statement
        Can be presented as a
        Single
        Double
        Income Statement
        Present info on financial results of a company's business activities over a period of time
        Present earnings per share
        Basic
        Diluted
        Net income = revenue + other income - expenses
        Other comprehensive income (OCI)
        All items impacting owner's equity but unresulting from transactions w/shareowners
      3. Cashflow
        Discloses
        Sources and uses of cash
        For users to evaluate
        Financial flexibility
        Ability to react and adapt to financial circumstances
        Solvency
        Liquidity
        Classifies cash transactions into
        Operating activities
        Investing activities
        Financing activities
      4. Statement of change in equity
        Reports changes in owner's investment over a period of time
  2. Supplementary disclosures
    1. Financial Notes and Supplementary schedules
      1. Provide info to understand info provided @statements
        Basis of prep. for financial statements
        Info about accounting policies, methods & estimates used to prep. F.S.
        Explanatory info about every line item
    2. Managment Commentary or MD&A
      1. Management discusses a variety of issues of concern
      2. Elements
        Nature of business
        Management's objectives & strategies
        Company's significant resources, risks & relations
        Operation's results
        Critical performance measures
    3. Auditor's report
      1. By independent auditor
        Written report about F.S.
        Objectives
        Obtain reasonable asssurence about whether th F.S. are free from material misstatement
        It is reasonable because auditor's estimate and use assumptions.
        Report on F.S. and communicate findings.
      2. Structure
        Intro
        Scope
        Nature of audit process
        Opinion
        express fairness of F.S.
        Types:
        Unqualified
        True and fair view
        Qualified
        Some limitations
        Must explain them
        Adverse
        F.S. are materially depart from standards
        Disclaimer of opinion
        Not possible to give an opinion
      3. Sarbanes-Oaxly Act
        Makes auditors , in US, give an opinion of internal control
    4. Other source of information
      1. Proxy Statements
        Info on
        Management & director's compensation
        Stock and performance
        Potential conflicts of interest
        Statements distributed to shareholders about matters that are to be put a vote at the next company's meeting
      2. Interim Report
        Present 4 F.S. & condensated notes
        Not audited
        Provide updates of performance and position since last annual report
      3. Periodic earnings announcement
        Important press release
        Followed by a conference call w/ seniors
      4. Info on the economy, industry and peer companies
        To put into perspective the company's performance
Financial Analysis Framework
1. Phase 1. Articulate purpose and context
  1. Inputs
    1. Nature of analysts function
      1. EX. Evaluating an equity,
      2. Debt investment
      3. Issuing credit rating
    2. Communication w/clients or supervisors on needs and concerns
    3. Institutional guidelines related to developing specific product
  2. Outputs
    1. Purpose or objective of the analysis
    2. List of questions to be answered w/ the analysis
    3. Nature & content of report to be provided
    4. Timetable and budgeted resources for completation
2. Phase 2. Collect input data
  1. Input
    1. F.S., other financial data, questionnaries, economy data
    2. Discussion w/ management, suppliers, customers & competitors
    3. Company sites visits
  2. Output
    1. Organized F.S.
    2. Financial data tables
    3. Completed questionnaries
3. Phase 3. Process Data
  1. Input
  2. Output
    1. Adjusted F.S.
    2. Common-size statements
    3. Ratios & graphs
    4. Forecasts
4. Phase 4. Analyze & Interpret
  1. Input
    1. Input & processed data
  2. Output
    1. Analytical results
5. Phase 5. Develop and communicate conclusions and recomendations
  1. Input
    1. Previous output
    2. Institutional guidelines for published reports
  2. Output
    1. Analytical report answering questions of phase 1.
    2. Recommendations regarding the purpose of analysis
6. Phase 6. Follow up
  1. Input
    1. Output of phase 5 repeated periodically
  2. Output
    1. Updated reports and recommendations

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