Question

Financial Statement Analysis

1.1. What types of questions can be answered by analyzing financial statements? 1.2. What is the eventual goal of the IASB? 1.3. What are the particular items an analyst should review and study in an annual report, and what material should be read with caution? 1.4. What can a financial analyst find in the MD&A section of the annual report? 1.5. What are the purposes of (a) the income statement, (b) the balance sheet, (c) the statement of cash flows, and (d) the statement of stockholders' equity? 1.6. Explain the importance of the notes to the financial statements. 1.7. What causes an auditor's report to be qualified? adverse? a disclaimer of opin- ion? unqualified with explanatory language? 1.8. Why is the management discussion and analysis useful to the financial analyst? 1.9. What is a proxy statement, and why is it important to the analyst? 1.10. Briefly describe the differences between the accrual basis of accounting and the cash basis of accounting.

Answer 1

Ans. 1.1: Financial Statement Analysis means applying method to draw factors from financial statement of company, which helps in making decision. Users of financials statement can be management of company, investors, financing institution, banks, general public or even government authorities. Generally investors or Financial Institutions (FIs) or Banks use this to determine financial health of company and also can use to evaluate the value of business or financial performance.

Financial Statements are always prepared for a period which can be a month or six month or a year. So analysis of this gives details on how the company has performed over the period or what are element responsible for profit/loss of the company. Financial statement analysis gives result related to liquidity position of the company., its inventory level and cash balances. Fin. Statement analysis also helps in identifying relationship in between expenses and sales. For Financial Institutions it helps them to find whether present cash flow is strong enough or not to re-pay principal amount and interest. Financial statements analysis answers how is enterprise value.

Ans. 1.2: The Ultimate goal of IASB (International Accounting Standard Board) is to come with such standards by using of which multi national company can prepare its books of accounts which can be treated as standardized accounting. It's a kind of global language for global enterprises. So Global Company needs to adopt and use Accounting standard announced by IASB and needs to prepare only one set of financial statements which will fulfill the statutory requirement of all the countries in which company operates.

Ans. 1.3: An Analyst should first of all review accounting policies and standards used in preparation of Financial statements. Thereafter he should check whether company is earning profit or loss. Then he should carefully examine cash flow of the company.Once Cash flow are properly understood, an analyst can can identify what is requirement of working capital and how assets of the company is performing and whether management performance of the company is good or needs improvement.

Ans. 1.4: MD&A Section in Annual report is a part wherein Management of company addresses performances of company with qualitative & quantitative measures. From this section an analyst can find how & what decisions management has taken to address challenges of the company, what systems and internal control are placed in the company and what plan of actions management is having in hand for future growth. This sections gives understanding to analyst as how effective is management in the company.