Financial Reporting
ANSWER
Refers to the way companies show their financial performance to investors, creditors, and
other interested parties by preparing and presenting financial statements.
Role of financial statement analysis
ANSWER
Use the information in a company's financial statements, along with other relevant infor-
mation, to make economic decisions.
Balance sheet (statement of financial position/ condition)
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Reports the firm's financial position at a point in time.
Fundamental accounting equation:
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Assets= liabilities + owner's equity
Capital structure
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Proportions of liabilities and equity used to finance a company.
Statement of comprehensive income
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1
,Reports all changes in equity except for shareholder transactions.
Income statement (statement of operations or p/ statement)
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Reports on the financial performance of the firm over a period of time.
Statement of changes in equity
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Reports the amounts and sources of changes in equity investors' investment in the firm over
a period of time.
Statement of cash flows
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Reports the company's cash receipts and payments.
Operating cash flows
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Include the cash effects of transactions that involve the normal business of the firm.
Investing cash flows
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Those resulting from the acquisition or sale of property, plan, and equipment; of a subsidiary
or segment; of securities; and of investments in other firms.
Financing cash flows
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Those resulting from issuance or retirement of the firm's debt and equity securities and in-
clude dividends paid to stockholders.
2
,Financial statement notes (footnotes)
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Include disclosures that provide further details about the information summarized in the fi-
nancial statements.
Management's commentary (Management's Discussion and Analysis (MD&A))
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One of the most useful sections of the annual report where management discussed a variety
of issues.
Standard auditor's opinion contains three parts:
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1.) Independent review by the auditor
2.) Reasonable assurance that the financial statements contain no material errors.
3.) Auditor is satisfied that the statements were prepared in accordance with accepted ac-
counting principles and that the principles chosen and estimates made are reasonable. Must
also contain additional explanation when accounting methods have not been used consist-
ently between periods.
Unqualified opinion (unmodified or clean opinion)
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Indicates that the auditor believes the statements are free from material omissions and er-
rors.
Qualified opinion
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If the statements are not free of material omissions and errors.
3
, Adverse opinion
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Statements are not presented fairly or are materially non conforming with accounting stand-
ards.
Disclaimer of opinion
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Auditor is unable to express an opinion.
Modified opinion
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Any opinion that is not unqualified.
Internal controls
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Processes by which the company ensures that it presents accurate financial statements
where management is held accountable.
Proxy statements
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Are issued to shareholders when there are matters that require a shareholder vote.
Earnings guidance
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Firms often provide this before financial statements are released to give out to shareholders.
The six steps of the financial statement analysis framework:
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4
ANSWER
Refers to the way companies show their financial performance to investors, creditors, and
other interested parties by preparing and presenting financial statements.
Role of financial statement analysis
ANSWER
Use the information in a company's financial statements, along with other relevant infor-
mation, to make economic decisions.
Balance sheet (statement of financial position/ condition)
ANSWER
Reports the firm's financial position at a point in time.
Fundamental accounting equation:
ANSWER
Assets= liabilities + owner's equity
Capital structure
ANSWER
Proportions of liabilities and equity used to finance a company.
Statement of comprehensive income
ANSWER
1
,Reports all changes in equity except for shareholder transactions.
Income statement (statement of operations or p/ statement)
ANSWER
Reports on the financial performance of the firm over a period of time.
Statement of changes in equity
ANSWER
Reports the amounts and sources of changes in equity investors' investment in the firm over
a period of time.
Statement of cash flows
ANSWER
Reports the company's cash receipts and payments.
Operating cash flows
ANSWER
Include the cash effects of transactions that involve the normal business of the firm.
Investing cash flows
ANSWER
Those resulting from the acquisition or sale of property, plan, and equipment; of a subsidiary
or segment; of securities; and of investments in other firms.
Financing cash flows
ANSWER
Those resulting from issuance or retirement of the firm's debt and equity securities and in-
clude dividends paid to stockholders.
2
,Financial statement notes (footnotes)
ANSWER
Include disclosures that provide further details about the information summarized in the fi-
nancial statements.
Management's commentary (Management's Discussion and Analysis (MD&A))
ANSWER
One of the most useful sections of the annual report where management discussed a variety
of issues.
Standard auditor's opinion contains three parts:
ANSWER
1.) Independent review by the auditor
2.) Reasonable assurance that the financial statements contain no material errors.
3.) Auditor is satisfied that the statements were prepared in accordance with accepted ac-
counting principles and that the principles chosen and estimates made are reasonable. Must
also contain additional explanation when accounting methods have not been used consist-
ently between periods.
Unqualified opinion (unmodified or clean opinion)
ANSWER
Indicates that the auditor believes the statements are free from material omissions and er-
rors.
Qualified opinion
ANSWER
If the statements are not free of material omissions and errors.
3
, Adverse opinion
ANSWER
Statements are not presented fairly or are materially non conforming with accounting stand-
ards.
Disclaimer of opinion
ANSWER
Auditor is unable to express an opinion.
Modified opinion
ANSWER
Any opinion that is not unqualified.
Internal controls
ANSWER
Processes by which the company ensures that it presents accurate financial statements
where management is held accountable.
Proxy statements
ANSWER
Are issued to shareholders when there are matters that require a shareholder vote.
Earnings guidance
ANSWER
Firms often provide this before financial statements are released to give out to shareholders.
The six steps of the financial statement analysis framework:
ANSWER
4
