Environment and Framework of

Financial Statement Analysis

School of Accounting & Finance

AF420
Financial Statement Analysis
 
Trimester 3 2011

BY:
Dr. Gurdip Singh Batra
What constitutes a Financial
Statement?
 “A Financial Statement is an organized collection
of data according to logical and consistent
accounting Procedures”. Himpton Johar
 “Financial Statements are organized summaries of
detailed information and are thus a form of
analysis. The type of statements accountant
prepare, the way they arrange items on these
statements and their standards of disclosure are all
influenced by a desire to provide information in a
convenient way’. W B Meig
Environment of Financial Statement
Analysis: Determining Factors

 Financial Reporting System obtaining in a

country( Features of US Financial Reporting
System)
 Steps Towards Setting Global Accounting
Standards
 Role of International Accounting standard
Board
 Financial Accounting Standard Board and
Securities Exchange Commission (US GAAP)
Environment of Financial Statement
Analysis
 Role of financial Information and Capital Markets in
Investment decision Making
 Usefulness of the Principal Financial statements
 Usefulness of Management Discussion and analysis
and the other Sources of financial Information
 Role of Independent auditors and the Information
Conveyed by Audit opinions(See Annual Report s of
Aracruz, Pfizer etc in Gerald White text )
 Tax Regulations
 Role of stock Exchanges
Nature of Financial statements

 Financial Statements are the reports

prepared by the management depicting the
true and fair view of the state of affairs of the
entity for the period under review.
 Financial Statements are prepared keeping in
view the accounting period concept.
 Financial Statements are prepared as per
accounting conventions/practices and as per
generally accepted accounting principles.
Regulatory Regime

 International Accounting Standards(IAS)

 European Financial Reporting
Standards(EFRS)
 International organization of securities
Commission(IOSCO)
 SEC (USA)Reporting Requirements for
foreign registrants who want to issue
securities in USA
Nature of Financial statements
 Financial statements are based on the recorded facts as
per various accounting records

 Financial statements are summarized reports, the

details are shown in various schedules, notes etc.,
appended there to.

 Financial statements are influenced by the personal

judgments. For example the selection of method of
pricing Issue of materials, method of Depreciation,
writing of intangible assets etc.
Attributes of Financial statements

 Financial statements should be

Understandable
 Information disclosed should be relevant
 Reliability of the Information
 Timeliness of the Information
 Comparability of the Information
 Authenticity of the Information to be
vouched by an Auditor.
 Compliance with the Law
Attributes of Financial statements

 Accurate and Freedom from bias

 Promptness in preparing Financial
statements
 Conform to the GAAP
 Accounting Policies should be consistent
Limitations of Financial statements

 Records only Monetary Data

 Financial statements are historical in nature
 Financial statements are only influenced by
the accounting concepts and conventions
etc.
 Financial statements are influenced by the
personal judgments
 Financial statements fail to disclose the
adequate information
Limitations of Financial statements

 Financial statements ignore the effect of

accounting for price level changes since the
traditional accounting is based on the stable
monetary unit
 Financial statements fail to signify the non
financial factors
 Scope of manipulations in Accounting and
Audit : Case of ENON inc.USA, Case of
SATYAM Corporation, India
Principal Financial statements

 The financial reporting system generates

information through five financial statements:
 Statements of Income( Earnings Statement)
 Balance Sheet( Statement of financial Position)
 Statements of Cash Flows
 Statement of Share-Owners’ Equity
 Statement of Comprehensive Income
( See Financial statements of Aracruz, Texaco,
Pfizer etc)
Some issues relating to Financial
Statements
 Need for Transparency
 There has been much discussion on the issue of
transparency, which alludes to whether financial
reporting is informative enough for decision makers.
A lot of stakeholders pressure is there to make the
financial statements more transparent.
 Rationale of Corporate Governance Benchmarks
STAKEHOLDERS THAT DEMAND
DISCLOSURE OF FINANCIAL INFORMATION

 SHARE HOLDERS AND INVESTORS

 MANAGERS
 EMPLOYEES
 LENDERS AND SUPPLIERS
 CUSTOMERS
 GOVERNMENT AND REGULATORY
AGENCIES
FACTORS AFFECTING THE FINANCIAL
INFORMATION

MACRO AND MICRO FACTORS

 REGULATORY FACTORS
 MARKET FORCES
 COSTS ASSOCIATED WITH DISCLOSURE OF
INFORMATION
 IAS
 EMERGING TRENDS IN IFRS
MARKET RELATED FACTORS

 CAPITAL MARKET FACTORS

 LABOR MARKET FACTORS
 CORPORATE CONTROLS
 CORPORATE GOVERNANCE
REQUIREMENTS
COSTS ASSOCIATED WITH
DISCLOSURE OF INFORMATION

 COLLECTION CHARGES
 PROCESSING CHARGES
 PUBLICATION OF ANNUAL REPORTS
 LITIGATION CHARGES IF ANY
 COMPETITIVE DISADVANTAGE COST IF
ANY
References

 The analysis and use of Financial Statements by

Gerald I. White, Sondhi and Fried, John Wiley &
Sons, Inc. USA
 Essentials of financial analysis by George T. Fried
lob et al published by John Wiley & Sons, Inc.
 Financial Statement Analysis- By George Foster
 Financial statements analysis – by Wild and
Subramanium
 Managerial accounting by James Jiambalvo, wiley
THANK YOU