FSA

Issues for Discussion

Objectives of Financial Reporting

a) Provide information about
o Enterprises economic resources
o Claims to those resources;
o The effects of transactions, events, and circumstances that change
resources and claims to resources
b) Information useful in Investment and Credit Decisions
c) Information useful in Assessing Cash Flow Prospects
Primary Quality of Financial Reporting
a. Relevance

Predictive value

Feedback value

Timeliness

b. Reliability

Verifiability

Neutrality

Representational

Financial Items to Financial Statements

a. Financial Items: Incomes, Expenses, Assets, and Liabilities
b. Every financial transaction affects financial items
c. Every financial item find a place in the financial statement(s0.
d. So every financial transaction affects the financial statements
e. One can understand the financial transactions undertaken by a company by
checking the financial statements.
Financial Transactions are the result of financial decisions

Financial decisions of a company can be divided into three broad categories:

1. Financing Decisions
2. Investment Decisions
3. Operating Decisions

FSA

Issues for Discussion

Every financial decision will affect the financial statements: IS/BS/CFS

By studying the financial statements one can understand the decisions made by a
company.

Financial Statements: BS, IS, and CFS

BS: Balance sheet shows the assets and the corresponding sources of acquiring
those assets. BS reflects the accounting equation at a particular point of time. BS

IS: Income statement shows the incomes and expenses of a company during a
particular period. It shows the net result: profit or loss

CFS: Cash flow statement shows cash receipts and cash payments of a company
during a particular period of time.

Financial Statement Analysis

1. FSA involves comparison
a. Inter Company Comparison
b. Intra Company Comparison
2. Tools of Analysis/Comparison
a. Common Size Statements
b. Comparative Statements
c. Ratio Analysis
3. Why FSA?
a. Performance Evaluation: Manager/Unit/Company
b. Equity Research
c. Bankruptcy Prediction
d. Valuation
4. What to analyze?
a. Liquidity
b. Solvency
c. Profitability
d. Efficiency

FSA

Issues for Discussion