CFA Level 1 - Financial Statement Analysis (Introduction to Financial Statement Analysis)

Reading 15. Introduction to Financial Statement Analysis

15.1 Financial Statement Roles

 

     1. Financial reporting:

        -> To provide useful information about a company's performance and financial position.

     2. Financial statement analysis:

        -> To use the data from financial statements to support economic decisions.

     

     3. The statement of financial position (balance Sheet):

        -> To show assets, liabilities, and owner's equity at a point in time.

          Assets: Resources controlled by the firm.

          Liabilities: Amounts owed to lenders and other creditors.

          Owner's equity(Shareholder's equity or net assets): Residual interest in the net assets (Asset - Liabilities) of an entity.

 

     4. The statement of comprehensive income:

        -> To report all changes in equity except for shareholder transactions.

     5. The income statement:

        -> To report on the financial performance over a period of time.

          Revenues: Inflows from activities that constitute the entity's ongoing central operations.

          Expenses: Outflows from activities that constitute the entity's ongoing central operations.

          Other income: gains that may or may not in the ordinary business.

 

     6. The statement of changes in equity:

        -> To report the amounts and sources of changes in equity investors' investment over a period of time.

     7. The statment of cash flows:

        -> To report the company's cash receipts and payments.

          Operating Cash flows: Cash effects from normal business.

          Investing Cash flows: Resulting from investments in the firm.

          Financing Cash flows: Resulting from issuance or retirement of the firm's debt and equity securities including dividends.

 

 

15.2 Footnotes, Audit, and Analysis

 

    1. Financial statement notes (Footnotes):

       -> Disclose Important info about accounting methods, estimates, and assumptions and additional info about acquisitions or disposals, legal actions, contingencies and segments of the firm.

    2. Management's Commentary [a.k.a Management's Discussion and Analysis (MD&A)]

       -> Contains an overview of the company and info about business trends, future capital needs, liquidity and significant choices of accounting methods requiring management judgement.

    3. Audit:

       -> To provide an opinion on the statement's fairness and reliability

    4. Auditor's opinion:

       -> To give evidence of an independent review of the financial statements containing no errors and using appropriate accounting principles for reasonable assurance.

       -> Unqualified opinion if the statements are free from errors.

       -> Qualified opinion notes any exceptions to accounting pronciples.

       -> Adverse opinion if the statements are not presented fairly in the auditor's opinion.

       -> Disclaimer if the auditor is unable to express an opinion.

    5. Internal Controls:

      -> Management is responsible for an effective internal control to ensure the accuracy of its financial statements.

    6. The framework for financial analysis:

       -> State the goal of the analysis.

       -> Gather data.

       -> Process the data.

       -> Analyze and interpret the data.

       -> Report the conclusions or recommendations.

       -> Update the analysis.