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Financial Statement Analysis

Financial Statement Analysis

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syed sajid
syed sajid

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Published by: sajidsfa on Feb 17, 2010
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05/03/2013

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FINANCIAL STATEMENT ANALYSIS:Abstract
The quality of financial information determines the value of analysis.
Financial information must be accurate, timely and comprehensive to be useful inthe financial management
Financial statements compares the company against itself to evaluate strengths andweakness
Requires at least three years of historical financial information to identify operatingrecords
Use industry standards as one of the measures but not the only measure of  performance
Financial analysis raises the questions to be answered and the issues to beaddressed
INTRODUCTION
The conceptual framework sets out the concepts underlying the preparation and presentation of general-purpose financial reports. The accounting standards, rules and guidance applicableunder Presentation of Financial Statements’ and AASB 108 ‘Accounting Policies, Changes inAccounting Estimates and Errors’ are based on that framework.If there is a conflict between the ‘Framework’ and an Australian equivalent to an InternationalFinancial Reporting Standard (IFRS), the requirements of the IFRS prevail.The International Accounting Standards Board (IASB) ‘Framework for the Preparation andPresentation of Financial Statements’ has been adopted in the Australian context as follows:
OVERVIEW
The conceptual framework applicable on adoption of International Financial Reporting Standards(IFRS) will be:
Definition of the Reporting Entity’;
Objective of General Purpose Financial Reporting’; and
‘Framework’ - Framework for the Preparation and Presentation of Financial Statements.The existing conceptual framework is provided in:
Definition of the Reporting Entity’;
Objective of General Purpose Financial Reporting’;
 
Qualitative Characteristics of Financial Information’; and
Definition and Recognition of the Elements of Financial Statements’.will continue to apply in order to provide guidance for the IFRS application paragraphs.The ‘Framework’ will replace which will be withdrawn. Although the ‘Framework’ is brief incomparison the concepts are similar with the key differences being that the ‘Framework’:
includes prudence as a qualitative characteristic; and
identifies two components to both income and expenses
Another Financial Ratios:Working Capital:
Current Assets-Current Liabilities
Measures of liquidity: excess of current assets over current liabilities
Lenders look for a positive and growing amount of the working capital asa sign that a company can handle its short-term obligation
Current Ratios:
Current Assets/Current Liabilities
A variation on the working capital measure of liquidity
Lenders look for a 2:1 ratio which indicates that there are twice as manycurrent liabilities to satisfy current short-term obligations
Debt and Equity
Short term and Long term debt/Net worth
Measures the percent of the company financed by lenders relative toowner 
Fact: Most private sector lender won’t finance companies with more than2:1 ratio: public lenders may go up to 5:1
Definition of the Reporting EntityObjective of General Purpose Financial Reports
will continue to apply in order to provide guidance for the IFRS application paragraphs. The‘Framework’ also addresses issues discussedreporting entity concept is embedded in the reporting structure and implemented through theIFRS application paragraphs. Similarly, the general purpose financial report concept is essentialto the operation of the application paragraphs.
 
Qualitative Characteristics of Financial InformationDefinition and Recognition of the Elements of Financial Statements
The ‘Framework’ will replace which will be withdrawn. Although the ‘Framework’ is brief incomparison the concepts are similar with the key differences being that the ‘Framework’includes prudence as a qualitative characteristic and identifies two components to both incomeand expenses.
APPLICATION DATE
The Framework is applicable to annual reporting periods.
KEY DIFFERENCES FROM THE EXISTING CONCEPTUAL FRAMEWORK Public sector application
The IASB framework focuses on for-profit entities and lacks commentary specific to thecircumstances of not-for-profit entities. The is responsible for setting standards for all types of reporting entities and satisfies that responsibility by providing sector neutral pronouncementswith additional commentary for not-for-profit entities.The existing explanatory references and examples relevant to the public sector and not-for-profitentities that will be lost on transition.
Income and Revenue
Under the ‘Framework’ some inflows are shown on a gross basis and others on a net basiswhereas inflows are shown on a gross basis.definition of “income” encompasses “both revenue and gains” where:
revenue “arises in the course of the ordinary activities of an entity”; and
“gains” are determined on a net basis (proceeds less the carrying amount and/or costs of achieving the proceeds) and “may, or may not, arise in the course of the ordinary activitiesof an entity”.defines “revenue” as “inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity”.For example, under the net gain on a disposal will be recognised and reported as income (gain).Under the current arrangements the gross proceeds of the disposal are recognised as revenue andthe carrying amount is expensed.

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