Financial Statement Analysis Introduction

Financial Statement Analysis Introduction – 1 Study of Financial Statements: Introduction 2014 IFT Notes for Level I Financial Reporting and the CFA Exam.

2 Table of Contents 1. Introduction to Analyzing Financial Statements Objectives of Financial Statements and Other Information Statements Overview of Financial Statements Framework Steps next This document should be read in conjunction with the readings in the 2014 Level I CFA syllabus Program. Some graphs, charts, tables, examples and figures are copyright 2013, CFA Institute. Reprinted and republished with permission of CFA Institute. All rights reserved. Disclaimer: The CFA Institute does not endorse, promote, or guarantee the accuracy or quality of any products or services provided by Irbanullah Financial. Coaching. CFA Institute, CFA and Chartered Financial Analyst are trade marks owned by the CFA Institute. Copyright Irbanullah Finance Training. All rights reserved. Page 2

Financial Statement Analysis Introduction

Financial Statement Analysis Introduction

3 1. Introduction Financial analysis is the process of analyzing the company’s performance in the context of its industry and the economic environment in order to obtain a conclusion or statement. For this purpose, financial statements are one of the most important sources of information available to financial analysts. Likewise, the auditor uses information in the financial statements and supporting information (such as management discussions). It is important for a researcher to have a strong understanding of each of these sources of information. 2. Purpose of Financial Reporting In order to develop a basic understanding of financial reporting, we must first understand the difference between the responsibilities of financial reporting. finance and financial statement analysis. The role of financial statements is to provide information about a company’s performance (income statement), financial position (balance sheet) and changes in price levels. money (statement of changes in equity). The role of the financial statement analyst is to use the financial statements prepared by companies, along with other information, to analyze the past current, and future performance and financial conditions in order to make investment, credit, and other economic decisions. . Examples of such decisions include: Should a fund be included in a portfolio? Should credit be extended to a customer? What is the future earnings and cash flow of a particular company? The company’s performance includes the company’s profitability, ability to generate positive income, liquidity and turnover. Liquidity refers to a company’s ability to meet its short-term obligations. Solvency refers to a company’s ability to meet its long-term obligations. Copyright Irbanullah Finance Training. All rights reserved. Page 3

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4 3. Financial Statements and Other Sources of Information Companies prepare financial statements at regular intervals (annual, semi-annual, and/or quarterly). subject to regulatory requirements). These financial statements include financial statements and accompanying notes and information. Financial statements summarize financial information for users outside the company, such as investors, creditors, and auditors. 3.1 Financial Statements and Supporting Information A complete set of financial statements: (i) Balance Sheet (ii) Income Statement (iii) Statement of Changes in Position (iv) Four Income statements are discussed in detail in the following section. Along with these required financial statements, the company often provides additional information in its financial statements. Including a management discussion book (called Management Discussion & Analysis [MD&A]), the external auditor’s report provides four warranty, a statement of corporate responsibility, and more. We have now discussed each financial statement and some additional information contained in the financial statements. Assets, liabilities and shares of the owner at a particular time. Assets are the resources controlled by the company, and the company’s liabilities are obligations to creditors and other creditors. Owner’s equity refers to the excess of assets over liabilities. The owner’s remaining interest (claims ratio) in the company’s assets after deducting its liabilities. Copyright Irbanullah Finance Training. All rights reserved. Page 4

5 The relationship between these three parts of the balance sheet can be shown in the equation below (sometimes called the balance sheet): Assets = Liabilities + Owner’s Equity. An example of a balance sheet is shown below: assets liabilities assets current assets of $ 2005 payments of $ 70,000 payments of $ 75,000 payments of $ 75,000 of $ 700,000 financing – long-term investment Mortgage investment 60,000 Property, Plant and Equipment Income Tax Deferred 74,000 $100 Insurance 35,000 Mortgage debt 60,000 Property, Plant and Equipment Income Tax Deferred Earnings 74, 000 $269, 00000 $269, 00002 $269, 0000 $269, 000002 Land Equipment $100,000 Less: Additional Depreciation. Depreciation -75,000 $25, Intangible Assets 275,000 Stockholders’ Equity $450,000 Other Assets Net Income 270,000 Employees 25,000 Total Shares $1,0002, Total $2,000 the company, Total $2,000 the company, Total $2,000 a company. . These include real assets and intangible assets. On the right, there is Copyright Irbanullah Financial Practice for Liabilities and Ownership. All rights reserved. Page 5

6 are listed. As the financial formula indicates, the sum of the two sides must be equal. The balance sheet is always made at a specific time, such as December 31. Statement of comprehensive income Under IFRS, the statement of income provides information about the financial results of operations. a company’s business for a specific period, either a statement of comprehensive income or two statements, the statement of income and the statement of comprehensive income. Also known as the statement of operations and the statement of profit and loss (P&L). An income statement shows the amount of revenue and other income a company has earned over a period of time and the expenses incurred to generate that revenue and other income. Revenue refers to the amount paid for the provision of goods or services in the ordinary course of business. Expenses include selling expenses, administrative expenses and income tax expenses. An example of an income statement is shown below: Sales Revenue $650,000 Expenses and losses Cost of goods sold 200,000 Selling expenses 150,000 General and administrative expenses 165,000 Loss on sale of real estate 2,100 Interest 6,100 Income before tax000 Profit 6,100 Income before tax $00 $114,900 Copyright Irbanullah Financial Practice. All rights reserved. Page 6

7 Net income (also known as net income) is often referred to as the bottom line in the income statement and can be calculated using the equation below. below: Fixed Income = Income + Other Expenses = Expenses. Companies report basic and diluted earnings per share on their income statements. Earnings per share (EPS) figures represent net income attributable to a class of shareholders divided by the number of shares outstanding during the period. Basic EPS is calculated by calculating the ratio of common (ordinary) shares outstanding. Diluted EPS is based on the number of shares outstanding minus the number of shares outstanding if any claims on the stock are exercised (ie such as stocks and convertible bonds). Impact of transactions with shareholders. Under IFRS, while it is presented in two statements, the statement of comprehensive income starts with the profit or loss from the income statement and stops provide part of other comprehensive income. Examples of these categories are trading differences in the transfer of foreign operations, deferred taxes and income from available-for-sale financial assets. in equity Statement of changes in equity Statement of changes in business owners’ investments. The main components of owners’ equity are paid-in capital and retained earnings. Retained earnings include the amount of company profits retained within the company. In addition, interest and reserves (for all other income) are shown in the statement of common income. It helps lenders, investors, and other report users evaluate a company’s financial performance, Copyright Irbanullah Financial Practice. All rights reserved. Page 7

Download Analysis And Interpretation Of Financial Statements Cs Notes Pdf Online 2022

8 Credit and Financing. Financial flexibility is the company’s ability to respond to financial problems and opportunities. A statement of cash flows organizes a company’s finances into three categories: operating, investing, and financing. Cash from operating activities generally includes the cash effect of transactions used to calculate income and, therefore, includes day-to-day operations.

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