29: Financial Statement Analysis: An Introduction
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1. Are quarterly or semiannual reports necessarily audited?: No
2. An audit is what?: It's an independent review of an entity's
financial statements.
3. The "cash flow statement" reports what?: It reports the
company's cash receipts and payments. These cash flows are
classified as follows: Operating cash flows, Investing cash
flows, and Financing cash flows.
4. "Corporate reports" and "press releases" are written by
management and are often viewed as public relations or
sales material.: OK
5. For publicly held companies in the U.S., MD&A is required to
discuss what?: Results from operations, with a discussion of
trends in sales and expenses; Discussion of significant effects
of currently known trends, events, and uncertainties; Capital
resources and liquidity, with a discussion of trends in cash
flows; A general business overview based on known trends
6. Necessary competitive analysis can be acquired from
where?: From trade journals, statistical reporting services, and
government agencies.
7. The statement of changes in owners' equity reports what?:
Reports the amounts and sources of changes in equity
investors' investment in the firm over a period of time.
8. A statement that the firm's management is responsible for
what?: For implementing and maintaining effective internal
controls; A description of how management evaluates the
internal control system; An assessment by management of the
effectiveness over the most recent year of the firm's internal
controls; A statement that the firm's auditors have assessed
management's report on internal controls; A statement
certifying that the firm's financial statements are presented
failry.
9. T/F: Footnotes are audited.: True; footnotes are audited.
10. Uncertainties may be related to the valuation or realization
of asset values or to litigation. This type of disclosure merits
what?: Closer examination by the analyst.
11. What are a company's "internal controls"?: These are
processes by which the company ensures that it presents
accurate financial statements. The auditor can provide this
opinion separately or as the 4th element of the standard
auditor's opinion.
12. What are additional things that the MD&A can include?:
Discussion of accounting policies that require significant
judgments; Discontinued operations, extraordinary items, and
other unusual or infrequent events; Extensive disclosures in
interim financial statements; Disclosure of a segment's need for
cash flows or its contribution to revenues or profit.
13. What are "expenses"?: They're outflows from delivering or
producing goods or services that constitute the entity's
ongoing major or central operations.
14. What are "financing cash flows"?: They're cash flows resulting
from issuance or retirement of the firm's debt and equity
securities and include dividends paid to stockholders,
15. What are "Gains and losses"?: They're increases and decreases
in equity or net assets from peripheral or incidental
transactions.
16. What are "investing cash flows"?: They're cash flows resulting
from the acquisition or sale of property, plant, and equipment;
of a subsidiary or segment; of securities; and of investments in
other firms.
17. What are "Liabilities"?: Liabilities are probable future economic
costs. They arise from present obligations of a particular entity
to transfer assets or provide services to other entities in the
future as a result of past transactions or events.
18. What are "operating cash flows"?: They include the cash
effects of transactions that involve the normal business of the
firm.
19. What are "revenues"?: They are inflows from delivering or
producing goods, rendering services, or other activities that
constitute the entity's ongoing major or central operations.
20. What are some additional pieces of information that
footnotes provide?: Information on business acquisitions or
disposals, legal actions, employee benefit plans,
contingencies and commitments, significant customers, sales
to related parties, and segments of the firm.
21. What are some decisions involved in financial statement
analysis?: Whether to invest in the company's securities or
recommend them to investors and whether to extend trade or
bank credit to the company.
22. What are the 3 elements of a balance sheet?: Assets,
Liabilities, Owners' equity
23. What are the elements of the income statement?: Revenues,
expenses, gains, and losses
24. What does an auditor generally do?: An auditor examines the
company's accounting and internal control systems, confirms
assets and liabilities, and generally tries to determine that
there are not material errors in the financial statements.
25. What does the "standard auditor's opinion" contain?: (1)
Whereas the financial statements are prepared by management
and are its responsibility, the auditor has performed an
independent review (2) Generally accepted auditing standards
were followed (3) The auditor is satisfied that the statements
were prepared in accordance with accepted accounting
principles and the principles chosen and estimates made are
reasonable. The auditor's report must also contain additional
explanation when accounting methods have not been used
consistently between periods.
26. What do footnotes provide?: They provide information about
accounting methods, assumptions, and estimates used by
management.
27. What information do "supplementary schedules" contain?:
Operating income or sales by region or business segment;
Reserves for an oil and gas company; Information about
hedging activities and financial instruments.
28. What is an "adverse opinion"?: If statements are not presented
fairly or are materially nonconforming with accounting
standards.
29. What is an "Asset"?: Assets are probable current and future
economic benefits obtained or controlled by a particular
entity as a result of past transactions or events. Assets are a
firm's economic resources.
30. What is a "qualified opinion"?: There might be material
omissions and errors but these will be stated.
40. When are "Proxy statements" issued to shareholders?: When
there are matters that require a shareholder vote. Proxy
statements are a good source of information about the
election of (and qualifications of) board members,
compensation, management qualifications, and the issuance of
stock options.
41. When might an auditor have an explanatory paragraph?:
When a material loss is probable but the amount cannot be
reasonably estimated.

31. What is "Owners' equity"?: It's the residual interest in the net 42. Why do analysts use financial statements?: To evaluate a
assets of an entity that remains after deducting its liabilities. company's past performance and current financial position in
order to form opinions about the company's ability to earn
32. What is Step 2 in the financial statement analysis
profits and generate cash flow in the future.
framework?: Gather data. Acquire the company's financial
statements and other relevant data on its industry and the
economy. Ask questions of the company's management,
suppliers, and customers, and visit company sites.
33. What is Step 3 in the financial statement analysis
framework?: Process the data. Make any appropriate
adjustments to the financial statements. Calculate ratios.
Prepare exhibits such as graphs and common-size balance
sheets.
34. What is Step 4 in the financial statement analysis
framework?: Analyze and interpret the data; Use the data to
answer the questions stated in the first step. Decide what
conclusions or recommendations the information supports.
35. What is Step 5 in the financial statement analysis
framework?: Report the conclusions or recommendations;
Prepare a report and communicate it to its intended audience.
Be sure the report and its dissemination comply with the Code
and Standards that relate to investment analysis and
recommendation.
36. What is Step 6 in the financial statement analysis
framework?: Update the analysis; Repeat these steps
periodically and change the conclusions or recommendations
when necessary.
37. What is the first step in the financial statement analysis
framework?: State the objective and context; Determine what
questions the analysis seeks to answer, the form in which this
information needs to be presented, and what resources and
how much time are available to perform the analysis.
38. What is the "going concern assumption"?: The assumption
that the firm will continue to operate for the foreseeable future.
39. What is the objective of a financial statement?: The objective
of financial statements is to provide information about the
financial position, performance, and changes in financial
position of an entity that is useful to a wide range of users in
making economic decisions.