FINANCIAL REPORTING AND ANALYSIS:

AN INTRODUCTION
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READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 2

 THE ROLE OF FINANCIAL REPORTING AND FINANCIAL STATEMENT ANALYSIS

 Financial reporting is a method of showing financial performance to the interest

parties (investors, creditors etc.) by preparing and presenting financial
statements

 “The objective of general purpose financial reporting is to provide financial

information about the reporting entity that is useful to existing and potential
investors, lenders, and other creditors in making decisions about providing
resources to the entity…”, IASB Conceptual Framework for Financial Reporting

 The final goal of financial statement analysis is to make economic decisions

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 3

 THE ROLES OF THE KEY FINANCIAL STATEMENTS IN EVALUATING A COMPANY’S
PERFORMANCE AND FINANCIAL POSITION

 Balance sheet is a snapshot of a company’s financial position AT A CERTAIN

POINT OF TIME

 It consists from three parts:

 Assets, the resources controlled by the firm (what does the firm own)

 Liabilities, the amounts owed to the third-parties (lenders, creditors,

suppliers etc.)

 Shareholders’ equity , residual interest that remain after netting assets

with liabilities

 Key accounting equation: ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 4

 THE ROLES OF THE KEY FINANCIAL STATEMENTS IN EVALUATING A COMPANY’S
PERFORMANCE AND FINANCIAL POSITION

 The statement of comprehensive income is a report on all changes in equity

except for shareholder transactions (that is issuing or repurchasing a stock and
paying dividends)

 Income statement is a report on the financial performance of the company

OVER A CERTAIN PERIOD OF TIME

 It consists from:

 Revenues and other income

 Expenses

 Under IFRS: IS can be combined with “other comprehensive income” and

presented under single statement or those can be presented separately

 Under U.S. GAAP: same however companies can choose to report

comprehensive income in the statement of shareholders’ equity

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 5

 THE ROLES OF THE KEY FINANCIAL STATEMENTS IN EVALUATING A COMPANY’S
PERFORMANCE AND FINANCIAL POSITION

 The statement of changes in equity is a report on the changes of the amounts

and sources in equity investors’ investment OVER A CERTAIN PERIOD OF TIME

 The statement of cash flows is a report on the company’s change in cash

inflows and outflows OVER A CERTAIN PERIOD OF TIME

 It consists from:

 Operating cash flow

 Investing cash flow

 Financing cash flow

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 6

 THE IMPORTANCE OF FINANCIAL NOTES AND SUPPLEMENTARY INFORMATION

 Financial statement notes (footnotes) provide disclosures on selected items

from financial statements

 Describes basics of presentation

 Provides information about accounting methods, assumptions and

estimates

 Provides additional information on such items as business acquisitions,

disposals, legal events etc.

 Management’s commentary (MD&A) is a report on variety of issues such as

nature of the business, past performance, future outlook, selected operating
metrics etc.

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 THE OBJECTIVES OF AUDITS OF FINANCIAL STATEMENTS, THE TYPES OF AUDIT
REPORTS, AND THE IMPORTANCE OF EFFECTIVE INTERNAL CONTROLS

 Audit is an independent review of the company’s financial statements

 Objective is to provide an opinion on the fairness and reliability of the financial

statements

 The standard auditor’s opinion contains three parts and states:

 Whether the financial statements are prepared by management and are its
responsibility (auditors perform an independent review)

 Auditing standards were followed, thus providing assurance that the

financials statements have no material errors

 Financial statements are indeed prepared in accordance with generally

accepted accounting rules and auditors are satisfied with chosen principles
and estimates; also there should be an explanation in case of inconsistency
between the periods

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 8

 THE OBJECTIVES OF AUDITS OF FINANCIAL STATEMENTS, THE TYPES OF AUDIT
REPORTS, AND THE IMPORTANCE OF EFFECTIVE INTERNAL CONTROLS

 Unqualified opinion => financial statements are free from materials errors

 Qualified opinion => there exceptions from the generally accepted accounting
principles

 Adverse opinion => financial statements are nor presented fairly or are
materially nonconforming with accounting standards

 Disclaimer of opinion => auditor is unable to express an opinion

 Under U.S. GAAP: auditor should express an opinion on company’s internal

controls. i.e. processes by which company ensures accordance accuracy of the
financial statements

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 9

INFORMATION SOURCES THAT ANALYSTS USE IN FINANCIAL STATEMENT ANALYSIS

 In addition to the annual financial statements, an analyst should examine a

company’s quarterly or semiannual reports

 US public company’s reports can be obtained from SEC using EDGAR

 Form 10-K: annual report

 Form 10-Q: quarterly report

 Proxy statements are issued when there are matters that require a shareholder
vote

 Corporate reports and press-releases are written by management

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 THE STEPS IN THE FINANCIAL STATEMENT ANALYSIS FRAMEWORK

 Financial statement analysis framework:

1 State the objective and context

2 Gather data

3 Process the data

4 Analyze and interpret the data

5 Report the conclusions or recommendations

6 Update the analysis

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 11

 QUESTION

Which of the following statements most accurately describes the role of financial
statement analysis?

A) Make economic decisions

B) Create financial forecasts for third-parties

C) Use data to compare company with its peers

Financial statements’ analysis primary goal is to make economic decisions

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 12

 QUESTION

Where it is possible to find information about elections in the Board of Directors?

A) Form 10-K

B) Proxy statement

C) Press-release

All information which requires shareholders’ votes is filed in proxy statement

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 13

 QUESTION

What kind of report is issued by the auditors if company’s financial statement have
multiple material errors?

A) Unqualified opinion

B) Adverse opinion

C) Qualified opinion

If financial statements are not prepared fairly, auditors issue an adverse opinion

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 14

 HOMEWORK ASSIGNMENT
READING
CFA® Level I Curriculum (2019) Volume III  Reading 21

PRACTICE PROBLEMS
CFA® Level I Curriculum (2019) Volume III  Reading 21  Practice Problems

READING 21 FINANCIAL REPORTING AND ANALYSIS: AN INTRODUCTION 15