University of Phoenix ACT 212 2021/2022 Study Guide

A Purpose of financial statement analysis for these users is to provide strategic information to improve company efficiency and effectiveness in providing products and services. (Financial statement analysis tools are also used for personal financial investment decisions.) (Financial statement analysis is a topic on the CPA, CMA, CIA, and CFA exams.) • Our analysis emphasizes four areas of inquiry---with varying degrees of importance. These four areas are described and illustrated in this chapter and are considered the building blocks of financial statement analysis: 1. Liquidity and efficiency ability to meet short-term obligations and to efficiently generate revenues. 2. Solvency ability to generate future revenues and meet long-term obligations. 3. Profitability ability to provide financial rewards sufficient to attract and retain financing. 4. Market prospects ability to generate positive market expectations. • Most users must rely on general-purpose financial statements that in the (1) income statement, (2) balance sheet, (3) statement of stockholders’ equity (or statement of retained earnings), (4) statement of cash flows, and (5) notes to these statements. • Financial reporting refers to the communication of financial information useful for making investment, credit, and other business decisions. Financial reporting includes not only general- purpose financial statements but also information for SEC 10-K or other filings, press releases, shareholders’ meetings, forecasts, management letters, auditors’ reports, and webcasts. • Management’s Discussion and Analysis (MD&A) is one example of useful information outside traditional financial statements. Apple’s MD&A for example, begins with an overview, followed by critical accounting policies and estimates. It then discusses operating results followed by financial condition (liquidity, capital resources, and cash flows). The final few parts discuss legal proceedings, market risk of financial instruments, and risks from interest rate and foreign currency fluctuations. The MD&S is an excellent starting point in understanding a company’s business activities.