Financial Reporting & Auditing
important issues
2021 - 2022
Vrije Universiteit Brussel
Professor D. Breesch
, Financial accounting and Auditing – MA1 International Business
Part 2: introducing IFRS in the EU
the development of a simplified, common, and high quality accounting standard tailored to the
companies listed on certain trading venues could be a step forward in terms of transparency and
comparability, and if applied proportionally, could help those companies seeking cross-border
investors to be more attractive to them.
Fundamental characteristics
• Relevance
− Predictive value
− Confirmatory value
− Materiality and aggregation
• Faithful Representation
− Complete
− Neutral
− Free From Error
Enhancing characteristics
• Verifiability
• Comparability
• Timeliness
• Understandability
If financial information would not be complete, neutral or free from error, the user would not be
able to rely on the financial statements to make his/her decision.
Part 3: Financial statement Analysis
Investors (shareholders) are more interested in:
• Profitability: (future) performance of the company. Financial statements are specially
considered as predictor for the future. Last year performance is mainly relevant to evaluate
whether the company will do better or worse next year and whether the expected return is
adequate for the expected level of risk.
Creditors are more interested in:
• Financial strength of the company as the creditor’s main risk is that the company fails to
repay the loan (including the interest return) or is not able to pay its short-term liabilities
(mainly A/P) – default risk!
Long term solvency: the company’s ability to generate cash in order to meet long-term financial
obligation.
Short-term solvency: the company’s ability to generate cash to meet its short-term obligation.
Pagina | 1
, Financial accounting and Auditing – MA1 International Business
Comparison over time or between industries:
1. Time series analysis: comparing company performance over time.
2. Cross-sectional analysis: comparing company performance with similar companies in the
same industry (or with the industry average).
1. Horizontal analysis
Trend percentages : check trends in time, it gives a more clear view.
− Indicate the direction a business is taking
− Select a base year and set it equal to 100%
− Amount of each following year stated as a percentage of the base amount
2. Vertical analysis
Standardizing financial statements by introducing common denominator.
• In a common-size balance sheet each component of the statement of financial position is
expressed as a percentage of total assets.
• In a common-size statement of profit or loss each item is expressed as a percentage of sales.
• Useful for cross-sectional analysis, structural or vertical analysis.
3. Ratios
Ratios are used to express the relationship between 2 elements of financial data that are logically
linked, and compares that relationship in time or with the same relationship in another company.
3.1 Short term liquidity ratios
Liquidity: current ratio
− It measures the ability to pay current liabilities with current assets.
− In general, a higher current ratio indicates a stronger financial position.
Current assets – current liabilities should be positive, it’s important for ST and LT.
The higher, the better, always?
It depends on the quality of the underlying assets. It depends on how well they’re going to be
realised on becoming cash.
Accounts receivable → the higher, the better. It tells how many times during the year average
receivables were turned into cash.
Pagina | 2
important issues
2021 - 2022
Vrije Universiteit Brussel
Professor D. Breesch
, Financial accounting and Auditing – MA1 International Business
Part 2: introducing IFRS in the EU
the development of a simplified, common, and high quality accounting standard tailored to the
companies listed on certain trading venues could be a step forward in terms of transparency and
comparability, and if applied proportionally, could help those companies seeking cross-border
investors to be more attractive to them.
Fundamental characteristics
• Relevance
− Predictive value
− Confirmatory value
− Materiality and aggregation
• Faithful Representation
− Complete
− Neutral
− Free From Error
Enhancing characteristics
• Verifiability
• Comparability
• Timeliness
• Understandability
If financial information would not be complete, neutral or free from error, the user would not be
able to rely on the financial statements to make his/her decision.
Part 3: Financial statement Analysis
Investors (shareholders) are more interested in:
• Profitability: (future) performance of the company. Financial statements are specially
considered as predictor for the future. Last year performance is mainly relevant to evaluate
whether the company will do better or worse next year and whether the expected return is
adequate for the expected level of risk.
Creditors are more interested in:
• Financial strength of the company as the creditor’s main risk is that the company fails to
repay the loan (including the interest return) or is not able to pay its short-term liabilities
(mainly A/P) – default risk!
Long term solvency: the company’s ability to generate cash in order to meet long-term financial
obligation.
Short-term solvency: the company’s ability to generate cash to meet its short-term obligation.
Pagina | 1
, Financial accounting and Auditing – MA1 International Business
Comparison over time or between industries:
1. Time series analysis: comparing company performance over time.
2. Cross-sectional analysis: comparing company performance with similar companies in the
same industry (or with the industry average).
1. Horizontal analysis
Trend percentages : check trends in time, it gives a more clear view.
− Indicate the direction a business is taking
− Select a base year and set it equal to 100%
− Amount of each following year stated as a percentage of the base amount
2. Vertical analysis
Standardizing financial statements by introducing common denominator.
• In a common-size balance sheet each component of the statement of financial position is
expressed as a percentage of total assets.
• In a common-size statement of profit or loss each item is expressed as a percentage of sales.
• Useful for cross-sectional analysis, structural or vertical analysis.
3. Ratios
Ratios are used to express the relationship between 2 elements of financial data that are logically
linked, and compares that relationship in time or with the same relationship in another company.
3.1 Short term liquidity ratios
Liquidity: current ratio
− It measures the ability to pay current liabilities with current assets.
− In general, a higher current ratio indicates a stronger financial position.
Current assets – current liabilities should be positive, it’s important for ST and LT.
The higher, the better, always?
It depends on the quality of the underlying assets. It depends on how well they’re going to be
realised on becoming cash.
Accounts receivable → the higher, the better. It tells how many times during the year average
receivables were turned into cash.
Pagina | 2
