ACC 306

LECTURE # 2
 ACC306 - FINANCIAL STATEMENT ANALYSIS

LEARNING OUTCOME

• Cognize the nature and relevance of financial statements in

business environment

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News analysis

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

Topic sequence

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 Meaning of Financial
Statements
• Financial statements are summaries of the operating, financing, and investment activities
of a firm.

• summarize the past performance of an organization

• provide users with valuable insights into future performance.

• According to the Financial Accounting Standards Board (FASB), the financial statements
of a firm should provide sufficient information that is useful to
– investors and
– creditors
– in making their investment and credit decisions in an
informed way.
Financial statements can be analyzed to identify trends in
key financial data, compare financial performance across
companies,
and to calculate financial ratios that can be used to assess a
company’s current performance as well as its prospects for
the future.

A financial analyst is expected to be able to prepare base

year statements to enable trend analysis and review the
growth rates of the various elements of the financial
statement.
 MCQS
• The financial statements included in the
annual report to the shareholders are least
useful to which one of the following?
• a. Stockbrokers.
• b. Bankers preparing to lend money.
• c. Competing businesses.
• d. Managers in charge of operating activities
• D
 Financial Statement
It represent a basic but useful picture of an
entity and are required by the SEC (SEBI) for
all publicly traded companies
1.The income statement, which shows the
results of business activities over a period.
a. Statement of Earnings
b. Statement of Comprehensive
Income (which can be
presented separately or combined with the
Statement of Earnings) (p157)
2.The balance sheet, which shows an entity’s
financial position at a point in time (P155)

Refer Infosys annual report page 142

 Financial Statement
3. The statement of cash flows, which shows
an entity’s cash receipts, payments, and the
cash effects of its operating, investing, and
financing activities during the accounting
period. (P165)

4. The statement of changes in equity, which

shows owner investments, distribution of
profits to owners, and profits retained by
the company (P159)

5. Notes to financial statements (p200)

 MCQS

• What is an investor’s objective in financial statement analysis?

• a) To determine if the firm is risky.
• b) To determine the stability of earnings.
• c) To determine changes necessary to improve future
performance.
• d) To determine whether or not an investment is warranted by
estimating a company’s future earnings stream.
• D
 ACC 306: FINANCIAL STATEMENT ANALYSIS

NATURE OF FINANCIAL STATEMENTS

• Recorded Facts
• Accounting Conventions
• Postulates (Suggestions)
• Personal Judgments

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

OBJECTIVES OF FINANCIAL STATEMENTS

1. To provide reliable financial information about economic resources and
obligations of a business enterprise.
2. To provide reliable information about the net resources (resources less
obligations) of an enterprise that results from its activities.
3. To provide financial information that assists in estimating the earning
potentials of a business.
4. To provide other needed information about changes in economic
resources or obligation.
5. To disclose, to the extent possible, other information related to the
financial statements that is relevant to the needs of the users of these
statements.

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

FEATURES OF FINANCIAL STATEMENTS

• Relevance
• Accuracy and Freedom from Bias
• Comparability
• Analytical Presentation
• Promptness
• Generally Accepted Principles
• Consistency
• Authenticity
• Compliance with Law

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

TYPES OF FINANCIAL STATEMENTS

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 IMPORTANCE OF FINANCIAL STATEMENT ANALYSIS

IMPORTANCE

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

LIMITATIONS

• Only reflect the progress and position of the business at frequent

intervals during its life
• Are not absolutely final and accurate. As the balance sheet is
prepared on the basis of a going concern asset valuation represents
neither the realisable value nor replacement costs
• Ignores non-financial factors
• not always possible to discover false figures in financial statements

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 1

According to accrual concept of accounting, financial or business

transaction is recorded:
a) when cash is received or paid
b) when transaction occurs
c) when profit is computed
d) when balance sheet is prepared

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 1

According to accrual concept of accounting, financial or business

transaction is recorded:
a) when cash is received or paid
b) when transaction occurs
c) when profit is computed
d) when balance sheet is prepared

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 2

The John Marketing Company provides advertising services to an

investment company in year A but receives advertising fee in year
B. The John Marketing Company recognizes this revenue in year A.
This action of John Marketing Company is justified by:
a) business entity concept
b) revenue recognition principle
c) economic entity concept
d) going concern concept

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 2

The John Marketing Company provides advertising services to an

investment company in year A but receives advertising fee in year
B. The John Marketing Company recognizes this revenue in year A.
This action of John Marketing Company is justified by:
a) business entity concept
b) revenue recognition principle
c) economic entity concept
d) going concern concept

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 3

A company is a going concern if:

a) its balance sheet shows a strong financial position
b) its income statement for the current year shows huge profit
c) there is no evidence that it will or will have to cease operations
within foreseeable future.
d) it is a public limited company

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 3

A company is a going concern if:

a) its balance sheet shows a strong financial position
b) its income statement for the current year shows huge profit
c) there is no evidence that it will or will have to cease operations
within foreseeable future.
d) it is a public limited company

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 4

Which accounting concept or principle states that the transactions of a

business must be recorded separately from those of its owners or
other businesses?
a) materiality concept of accounting
b) time period concept of accounting
c) matching principle of accounting
d) business or economic entity concept of accounting

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 4

Which accounting concept or principle states that the transactions of a

business must be recorded separately from those of its owners or
other businesses?
a) materiality concept of accounting
b) time period concept of accounting
c) matching principle of accounting
d) business or economic entity concept of accounting

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 5

The shareholders are interested in financial statement analysis to

know:
a) Financial position
b) Profitability
c) Future business prospects
d) All of the above

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 5

The shareholders are interested in financial statement analysis to

know:
a) Financial position
b) Profitability
c) Future business prospects
d) All of the above

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 6

Which of the given party/parties should check short term solvency

position of a company before investing?
a) Supplier
b) Researcher
c) Employees
d) Trade Union

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 6

Which of the given party/parties should check short term solvency

position of a company before investing?
a) Supplier
b) Researcher
c) Employees
d) Trade Union

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 7

Identify the party/ parties interested in long term solvency position

of a business:
a) Management
b) Banks and Lenders
c) Both Management as well as Banks and Lenders
d) Neither Management nor Banks and Lenders

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 7

Identify the party/ parties interested in long term solvency position

of a business:
a) Management
b) Banks and Lenders
c) Both Management as well as Banks and Lenders
d) Neither Management nor Banks and Lenders

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 8 – Match the following

Parties Key interest area

A. Shareholder i. Short term Solvency position
B. Researcher ii. Growth
C. Supplier iii. Future Prospects of Business
D. Government iv. Financial position

a) A i ; B ii ; C iii; D iv
b) A iv ; B ii ; C iii; D iv
c) A iv ; B iii ; C i; D iv
d) A i ; B ii ; C iii; D i

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 ACC 306: FINANCIAL STATEMENT ANALYSIS

# POLLING 8 – Match the following

Parties Key interest area

A. Shareholder i. Short term Solvency position
B. Researcher ii. Growth
C. Supplier iii. Future Prospects of Business
D. Government iv. Financial position

a) A i ; B ii ; C iii; D iv
b) A iv ; B ii ; C iii; D iv
c) A iv ; B iii ; C i; D iv
d) A i ; B ii ; C iii; D i

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