Chapter 1 - Financial Analysis

Front 1

Balance sheet

Back 1

It shows the financial position of a firm on a particular date.

Front 2

Purpose of the Cash Flows statement?

Back 2

Provides info about the cash inflows and outflows from operating, financing, and investing activities during an accounting period.

Front 3

Income or Earnings Statement

Back 3

It presents the results of operations for the accounting period.

Front 4

Statement of Stockholders' Equity

Back 4

It reconciles the beginning and ending balances of all accounts that appear in the OE's section of the balance sheet.

Front 5

What does the balance sheet include?

Back 5

Assets, Liabilities, Owners' Equity

Front 6

What do the Notes to the Financial Statements include?

Back 6

--Major acquisitions or divestitures;
--Officer and employee retirement, Pension, and
stock options plans.
--Leasing arrangements
--Income taxes

Front 7

What does the Income Statement include?

Back 7

-Revenues
-Expenses
-Net Profit or Loss
-Net Profit or Loss per share

Front 8

Qualified Opinion

Back 8

The auditor encounters one of 2 types of situations which, although they don't comply with GAAP, the rest of the financial statements are presented fairly. An explanatory paragraph is added.

Front 9

Auditor's report

Back 9

A report by an independent auditor that attests to the fairness of the financial statements of a company.

Front 10

1st type of situation that would cause an auditor to issue a Qualified Opinion

Back 10

1. Single deviation from GAAP
(Depreciation not calculated correctly)

Front 11

2nd type of situation that causes an auditor to issue a Qualified Opinion

Back 11

2. Auditor could not audit one or more areas of the financial statements (not being able to audit the inventory, so it was unverifiable, but the rest of fin. stmts are presented fairly)

Front 12

UNQUALIFIED OPINION WITH EXPLANATORY LANGUAGE

Back 12

A consistency departure from GAAP due to a change in accounting principle, uncertainty caused by future events, or risky events or going-concern problems that the auditor wishes to add explanation.

Front 13

ADVERSE OPINION

Back 13

Auditor determines that the financial statements are materially misstated and do not conform to GAAP. (opposite of Unqualified)

Front 14

MANAGEMENT DISCUSSION AND ANALYSIS (MD&A)

Back 14

Financial review that contains info that cannot be found in the financial data.

Front 15

What does the MD&A include?

Back 15

Coverage of any favorable or unfavorable trends and significant events or uncertainties in the areas of Liquidity, Capital Resources, and results of Operations.

Front 16

LIQUIDITY (in MD&A)

Back 16

-Internal / External sources
-Ability to pay near-term obligations and plans to remedy

Front 17

CAPITAL RESOURCES (in MD&A)

Back 17

Commitments for, purpose, sources of funding and changes in the mix and cost of financing

Front 18

RESULTS OF OPERATIONS (in MD&A)

Back 18

-Breakdown of sales into price and volume components
-Discussion of events that cause material changes between revenue and costs
-Unusual occurrences affecting income from continuing operations

Front 19

Internal and External sources of liquidity

Back 19

Where do they get cash?

Hint 19

MD&A

Front 20

Material deficiencies in liquidity and how they will be remedied

Back 20

What are they doing to get cash and prevent bankruptcy?

Hint 20

MD&A

Front 21

Commitments for capital expenditures, purpose of such commitments, and expected sources of funding

Back 21

How much are they going to spend next year for investments in property, plant and equipment or acquisitions? How will they pay for them?

Hint 21

MD&A

Front 22

Anticipated changes in the mix and cost of financing resources

Back 22

Will the percentage of debt and equity change in the future relative to prior years? Will the company borrow more or less, sell stock, generate more profits or losses?

Hint 22

MD&A

Front 23

Unusual or infrequent transactions that affect income from continuing operations

Back 23

Will revenues or expenses be affected in the future by events not expected in the normal course of business ops?

Hint 23

MD&A

Front 24

Events that cause material changes in the relationship between costs and revenues

Back 24

Will there be major changes that cause revenues (or expenses) to increase or decrease without a corresponding change in expenses (or revenues)?

Hint 24

MD&A

Front 25

A breakdown of sales increases into price and volume components

Back 25

Did the company's sales increase because they sold more products or services or was the increase the result of price increases (or decrease in volume)?

Hint 25

MD&A

Front 26

Summary of Selected Financial Data (Highlights)

Back 26

Offers a quick look at some overall trends (5+ years)

Front 27

Summary of Selected Financial Data (Highlights)includes:

Back 27

-Net Sales
-Income or Loss from continuing operations
-Income or Loss from continuing ops per common share
-Total Assets
-Long-term obligations
-Redeemable preferred stock
-Cash dividends per common share

Front 28

Proxy Statement

Back 28

contains voting procedures and info, background info about nominated directors, director and executive compensation, audit committee report, breakdown of audit fees.

Front 29

Quality of Financial Reporting (Earnings Quality)

Back 29

To present, realistically and accurately, the TRUE financial POSITION of a firm.

Front 30

Purpose behind depreciating an asset

Back 30

To allocate the cost of an asset over its estimated life

Front 31

Examples of Discretionary expenses (Earning quality)

Back 31

1. Research and Development
2. Repair and maintenance
3. Advertising
4. Replacement of plant assets
5. Develop new product lines, disposal of operating division

Front 32

4 ways in which you can affect earnings quality

Back 32

1. Accounting policies, Estimates - Choices and Changes
2. Timing of Revenue and Expense Recognition
3. Discretionary Items
4. Non-Recurring and Non-Operating Items

Front 33

Examples of Accounting policies and Estimates
(Earnings quality)

Back 33

1. Choice in Depreciation method
2. Change in accounting policy - Inventory LIFO to FIFO or FIFO to LIFO
3. Change in estimate of life of L-T assets

Front 34

Examples of Timing of revenue and expense recognition
(Earnings quality)

Back 34

1. Should stay with revenue recognition and matching principle
2. Lean towards conservatism in writing off uncollectible receivables or writing down inventories to reflect market value.

Front 35

Examples of Non-Recurring and Non-Operating Items

Back 35

1. Gains and losses on sale of asset or business segment
2. Write-downs for the impairment of assets
3. Accounting changes
4. Extraordinary items