Financial Statement Analysis Week # 1

Financial Reports

A financial statement (financial report) is a formal record of the financial activities of a business,
person, or entity.

Financial report Includes:

1. Financial Highlights:
o The section of a corporate report providing investors with an overview of the
firm's performance during the period covered by the report.
o For example, a report's highlights may note a major acquisition made by the firm
during the period and it may discuss the implications of the acquisition relative to
future sales and corporate earnings.

2. Narrative text, Graphics and photos:

3. Management Decision and Analysis:

o A section of a company's annual report in which management discusses

numerous aspects of the company, both past and present.

4. Auditors Report:

5. Financial Statements:
o Balance Sheet (Statement of Financial Position)
o Income Statement (financial performance/Profit & loss Statement)
o Cash flow Statement
o Statement of owner’s Equity

6. Notes to financial Statements:

1 Prepared by Adnan Ali & Amir Ullah

Lectures at Qurtuba University, Peshawar Campus.
Financial Statement Analysis Week # 1
7. Summary financial data:

8. Corporate information:

USERS OF FINANCIAL REPORTS & ITS IMPORTANCE

 Government, Bond holder, Stockholder, Investors, Lending institution

 Potential Investors ˃>>>>>> For the purpose to buy or not to buy a company’s stock.
 Suppliers >>>>>>> For trade on credit (Weather to do or not)
 Management >>>>>>> To check its profitability and efficiency (performance and
control)
 Labor Union >>>>>>> For the purpose to identify the demand of employees
in an org.
 Keeping the above objectives of the different user we can say that the financial reports
are very important for rational decision making.

OBJECTIVES OF FINANCIAL REPOTING

 To provide the financial report user different sort of information to make rational
decision.
 For the improvement of the business performance.
 To maintain the companies record.
 To show the resources of the company and the clams on these resources.

Institute of Chartered Accountants of Pakistan (ICAP):-

Institute of Chartered Accountants of Pakistan (ICAP) is a professional accountancy body in

Pakistan. As of July 2010, it had 5,078 members working in and outside Pakistan. The institute
was established on July 1, 1961 to regulate the profession of accountancy in Pakistan. It is a
statutory autonomous body established under the Chartered Accountants Ordinance 1961.

2 Prepared by Adnan Ali & Amir Ullah

Lectures at Qurtuba University, Peshawar Campus.
Financial Statement Analysis Week # 1

GAAP (Generally Accepted Accounting Principle):

 The common set of accounting principles, standards and procedures that companies use
to compile their financial statements.
 A widely accepted set of rules, conventions, standards, and procedures for reporting
financial information, as established by the Financial Accounting Standards Board.
 A collection of commonly followed accounting rules and standards for financial
reporting.
 The purpose of GAAP is to ensure that financial reporting is transparent and consistent
from one organization to another.

Development of GAAP:

Security Act 1933 & 1934

i. Security Exchange Commission (SEC)
 According to the about Act sec was given the authority to develop Gaap
 For the purpose to protect investors from abuse & false statements that were
developed in 1920s and can be
 SEC issued financial report release (FRR)
 FRR defines different standard and solutions
 Problems were there in these standards which were set by SEC
 GAAP was not only the effort of SEC but I was done with the help of AICPA &
FASB.

Other Responsibilities

 Sales of Securities and IPO’s

 Regulate securities trading on national exchanges
 Monitoring all corporations operations in country.
ii. American Institute of Certified Public Accountants (AICPA)
 Started work with SEC in 1933’s

3 Prepared by Adnan Ali & Amir Ullah

Lectures at Qurtuba University, Peshawar Campus.
Financial Statement Analysis Week # 1
 Two committee were established by AICPA
1. Committee on Accounting Procedure
2. Committee on Accounting Terminologies

 Worked from 1939 to 1959

 Issued 51 Accounting Research Bulletins

Efforts made by these two committees were not enough so in 1959 AICP replaced both
committees with

 Accounting Principle Board (APB)

 Accounting Research Division (ARD)
 Worked from 159-1973
 ARD provided different researches to ABP for financial decision & Development of
principle
 ARD issued 14 Research studies
 Accounting principle board issued 31 opinions & 4 statements (Views of board)
 But they were also not effective and successful

Lot of pressure was created on SEC to come up with new ideas in order to develop GAAP

iii. Financial Accounting Standard Board (FASB)

 FASB work under Financial Accounting Foundation (FAF)
 FAF had 8 private members and 8 public members
 FASB Appointed Financial Accounting Standard Advisory Council
(FASAC)
a. Interpretations
 These pronouncement provides clarification to the previously issued
standards including SFAS, APB opinions and accounting research bulletins
 The interpretation has same authority and requires same majority votes for
passage as standard

4 Prepared by Adnan Ali & Amir Ullah

Lectures at Qurtuba University, Peshawar Campus.
Financial Statement Analysis Week # 1
b. Technical Bulletins
 These bulletins provides timely guidance on financial accounting and
reporting problems
 They may be use for other companies too if they don’t affect the other
companies
c. Statements of financial Accounting standards (SFAS
 These statements established GAAP for specific Accounting period

Procedure for SFAF Operation

 Board receives suggestions and advices from many sources such as AICPA,
FASAC, SEC and industrial organization
 First board need to be convinced that issues need to addressed or old issues
need to be reexamined
 Project is assigned to project manager & meeting starts take place
frequently b/w the board of members to gain understanding regarding issues
 Discussion Memorandum (DM) invitation to comments are issued. Which
contain all fact, information and point of view Distributed among public for
60 days
 Public hearing take place and every comment are recorded.
 Exposure Draft (ED) is prepared. This is presented to board.
 Which requires 5 votes for approval
 These processes takes 2 years to develop a statement
d. Conceptual Framework

5 Prepared by Adnan Ali & Amir Ullah

Lectures at Qurtuba University, Peshawar Campus.