Professional Documents
Culture Documents
FSA
CF A
CF A
WWW.GFEDU.NET
400-700-9596
R22 CF A
CF A
Financial Statement Analysis: An Introduction
2-50
FASBUS.GAAP
IASBIFRS
CF A
()
CF A
Financial position Financial performance Change in financial position
The balance sheet The income statement The cash flow statement
3-50
Statement of comprehensive income
CF A
Reports all change in equity expect for shareholder transactions
CF A
IFRS US.GAAP
4-50
Other relevant information
Providing information about accounting methods,
assumptions, and estimates
Financial statement Providing additional information about business acquisitions
notes(Footnotes) or disposal, legal actions, employee benefit plans, significant
customers, sales to related parties, and segment of the firm
Are audited
CF A
Supplementary
Operating income or sales by region or business segment
Reserves for an oil and gas company
schedules
CF A
Information about hedging activities and financial instruments
Providing an assessment of the financial performance and
condition of a company from the perspective of its management
Managements Results from operations, with a discussion of trends in sales and
Discussion and expense
Analysis(MDA) Capital resource and liquidity, with a discussion of trends in
cash flow
A general business overview based on known trends
Material events and uncertainties that may affect future
5-50
Quarterly or The most updated information on the major financial
semiannual reports statements and footnotes
Form 8-K
Acquisitions or disposals of major assets
Change in its ,management
Securities and
Change in corporate governance
Exchange Commission
(SEC) filings
Form 10-K
CF A
Annual financial statements
Form 10-Q
CF A
Quarterly financial statements
6-50
Autid
Unqualified (clean) opinion Free from material errors, fraud, or illegal acts
CF A
If statements make any exceptions to the accounting
Qualified opinion
principles, can issue qualified opinion and explain
A
the exceptions
7-50
R23 CF A
CF A
Financial Reporting Mechanics
8-50
Balance Sheet
Cash equivalents
Accounts receivables
Inventory
Financial assets
Prepaid expenses
Asset PP E
CF A
Investment in affiliates
Deferred tax assets
A
Intangible assent
CFAccounts payables
Financial liabilities
Unearned revenue
Income taxes payable
Liabilities
Long-term debt
Deferred tax liabilities
Capital
Owners equity Additional paid-in capital
Retained earnings
OCI
9-50
Income Statement
Sales
Revenue Gains
Investment income
COGS
SGA
Depreciation
CF A
Expenses
Amortization
Tax expense
CF A
Interest expense
Losses
Double-entry accounting
Assets= liabilities + owners equity
Owners equity = Contributed Capital + Retained earnings
Ending retained earnings = Beginning retained earnings + Net income - Dividend
Net income = Revenue - Expense
10-50
Accrual accounting
Cash received in advance Unearned revenue
Cash paid in advance Prepaid expense
Cash received in arrears Accrued revenue
Cash paid in arrears Accrued revenue
CF A
Assets
Liabilit Reve Expe Equi
revenue A liability
Unearned No revenue recognized
CF A
historical cost
Asset
C F A
current market valuesOCIEquity
12-50
R24 CF A
CF A
Financial Reporting Standards
13-50
FASBUS.GAAP
Standard-setting bodies
IASBIFRS
SECUS10K,10Q.8K
Regularly authorities
FSAUK
Qualitative Objective
CF A
Reporting
Characteristics
Relevance
Comparability
CFA
Elements
Faithful Verifiability
IASB
representation Timeliness
conceptual
Understandability Constraint
framework
Performance Financial Position Cost(cost/benefit
Income Assets considerations)
Expenses Liabilities Underlying
Capital maintenance Equity assumption
adjustments Accrual basis
Past cash flows Going concern
14-50
IASB general requirements
General Features Structure and Content
Fair presentation Classified balance sheet
Going concern Minimum specified information on face
Accrual basis Minimum specified note disclosure
Materiality and aggregation Comparative information
No offsetting
CF A
Frequency of reporting
Comparative information
A
Consistency of presentation
CF
15-50
Coherent financial reporting framework
Transparency Valuation
Comprehensiveness Standard setting
Consistency measurement
CF A
IASBFASB
IASB
CF A FASB
Lists income and expense as elements
related to performance
Includes revenues, expenses, gains, losses,
and comprehensive income
Defines it as a resource from which a Defines an assets as a future economic
future economic benefit is expected to benefit
flow
Allow the upward valuation Does not allow the upward valuation of
most assets
16-50
R25 CF A
CF A
Understanding the I/S
17-50
I/S
Net revenues from Sales of goods and services
Operating -Cost of goods sold/Cost of service provided
components Gross profit
-Other operating Expenses(SGA)
+Other Income and revenues
Non-operating
F A
Recurring income before interest and taxes from Continuing operations
C
components
The best indicator
-Financing Costs
Recurring (pretax) income from continuing operations
of future earnings
CF A
+/- Unusual or Infrequent Items
Pretax income from Continuing Operations
-Income Tax Expense
The line Net Income from Continuing Operations
Blow the line +/- Income from Discontinued Operations (net of tax)
+/- Extraordinary Items (net of tax)
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transferred.
The risk reward of ownership is
19-50
RevenueDelivery method
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rendered.
The price is determined or determinable.
The seller is reasonably sure of collecting money.
20-50
RevenueLong term contract
Condition Methods
Projects of long-term
contract. GAAP
Reliable estimates of the Percentage-of-completion method
revenues, costs and
LT contract completion time. IFRS
CF A
Projects of long-term
GAAP Completed contract method
projects.
CF A Revenue is recognized to the
Outcome of the project
cannot be reliably IFRS
extent of contract costs.
Costs are expenses when incurred.
Profits are recognized only at
estimated.
completion
F/S Items POC Completed Contract
CFS Cash flows Same Same
Cost recovery
of estate or other firm assets
Sales are recognized when cash is
Collectability is
F A
method (Similar
C
received
highly uncertain
to the completed Profit is recognized only when cash
contract method) collected exceeds costs incurred.
The discounted present value of the installment payments is
Outcome can be recognized at the time of sale.
reliably estimated The difference between the installment payments and
IFRS discounted present value is recognized as interest over time
Outcome cannot be Revenue recognition under IFRS is similar to cost recovery
reliably estimated method
22-50
RevenueBarter transactions( round-trip transaction)
U.S.GAAP IFRS
Can be recognized at fair value only if the firm
has historically received cash payments for Revenue must be based on the fair
such goods and services and can use this value of revenue from similar non-
historical experience to determine fair value. barter transactions with unrelated
Otherwise, the revenue is recorded at the
CF A parties.
carrying value of the asset surrendered.
RevenueGross and Net Reporting of Revenue
C F A
Gross revenue Net revenue
The selling firm reports sales revenue and cost of
goods sold separately.Profit is the same, sales are
Only the difference in sales and cost
is reported.
higher using gross revenue reporting.
U.S.GAAP gross revenue
Be the primary obligor under the contract.
Bear the inventory risk and credit risk.
Be able to choose its supplier.
Have reasonable latitude to establish the price.
23-50
2. Expense
Expenses are the amounts incurred to generate revenue and include cost of goods
sold, operating expenses, interest, and taxes.
CF A
Expenses are grouped together by their nature or function.
CF A
Matching principle Expenses are recognized in the same period as the revenue
24-50
3. Non-Recurring items
Reported above the line and presented on a pretax basis
Unusual or
G/L from the sale of assets or part of a business
Above the infrequent
Impairments , write-offs, write-downs, and restructuring
line items
costs.
Presented on net of tax
CF A
Extraordinary
items
Loss from expropriation of assets;
Gains or losses from early retirement of debt;
CF A
Uninsured losses from natural disasters
Discontinued Presented on net of tax
operations income/loss
Below the Change in accounting principle might be
line Accounting retrospective;
changes Change in accounting estimate prospective and not a
below line item.
25-50
4. EPS
Basic EPS Basic EPS=
A
New issue,
repurchase
Weighted by time (days or months)
CF
CF A
Not weighted by time, adjust the number of common share before
Stock dividend/split
the stock dividend or split
Diluted EPS=
.
+
+ (1)
Diluted EPS =+
.. + .
+ .
26-50
4. Comprehensive income
Net income
CF A
Foreign currency translation gains and (losses)
Adjustment for minimum pension liabilities
A
Comprehensive income
F
Unrealized g/l form cash flow hedging
C
OCI
derivatives
Unrealized g/l available for sale securities
Gross profit margin= Net profit margin=
27-50
R26 CF A
CF A
Understanding the B/S
28-50
Stockholders paid-in-capital
Capital Common excess of par i.e. premium
Additional paid-in-capital Capital in excess of par i.e. premium
Stock has been reacquired by issuing firm but
Treasury not yet retired
CF A
Retained earnings
Non voting rights, no dividend
Net Income - Dividend
Accumulated other comprehensive
Adjustments for minimum pension liability.
Unrealized gains and losses from cash hedging
income derivatives.
Unrealized gains losses from available-for-sale
securities.
Minority interest/Non-controlling
Group accounting
interest
30-50
Financial asset
Held-to-Maturity Available-for-sale Trading Securities
B/S Amortized cost Fair value Fair value
A
I/S
interest I/S I/S
CF
Dividend debt I/S I/S
CF A
Realized
G/l I/S I/S I/S
Fair B/SOCI I/S
Unrealized G/L
value
31-50
R27 CF A
CF A
Understanding the C/F
32-50
Information about a companys cash receipts and payments
during an accounting period.
Information about a companys operating, investing , and
CF/S
financing activities.
An understanding of the impact of accrual accounting events
CF A
on cash flows
CF A
I/S
Operating cash flow + Investing cash flow + Financing
CF/S
cash flow
B/S =Change in cash balance for the current year +
Beginning cash balance
= Ending cash balance
33-50
CF Inflows Outflows
A
CFO securities Interest paid
Interest received
CF
Cash paid for other expenses
Dividend received
Purchase trading
CF A
Sale proceeds from fixed assets
CFI
Sale proceeds from debt
equity investments
Acquisition of fixed assets
Acquisition of debtequity investments
Principal received from loans Loans made to others
made to others
34-50
IFRS vs US.GAAP
Items U.S.GAAP IFRS
Interest received CFO CFO or CFI
Interest paid CFO CFO or CFF
Dividends received CFO CFO or CFI
Dividends paid CFF
CF ACFO or CFF
Taxes paid CFO
CFO ,CFI or CFF
A
Bank overdrafts CFF Cash equivalents
CF
Encourage direct method,
but allows indirect method.
If direct method presented,
Encourage direct method
But permits either method
IFRS permits more flexibility in
Disclosure footnotes must provide
reporting
indirect method.
CFA
CFO CFI CFF
Direct Method Indirect Method Direct Method Direct Method
35-50
CFO
Indirect method Direct method
Cash received Opening A/R + net sales Closing A/R =Net
Net income
from customers sales - A/R
Opening A/P + COGS Closing A/P =- COGS +
A/P + Depreciation included in COGS (COGS
A
+Non cash expenses or - Cash paid to
losses suppliers
Inventory)
CF
= Opening Inventory + purchase Closing
Opening wage payables + wage expense
+Non cash revenues or
F A
- Cash paid to
C Closing wage payables = wage expense +
gains employees
wage payables
+/- Non operating items - Interests paid
- Increase in non-cash Opening tax payables + income tax expense
operating asset - Tax paid Closing tax payables = - income tax expense +
accounts(Inventory, A/R) tax payables
+Increase in operating
= CFO
liability accounts (A/P)
= CFO
36-50
CFI
Pay attention to the movement of fixed assets.
Cash used in purchase
Book Value = Carrying value = Purchase cost AD Impairment
of fixed assets
BV end = BV Begin + Purchase Disposal BV - Depreciation
Proceeds received
CF A
Gain or loss = proceeds received disposal NBV
from sale of fixed Gain or loss resulting from disposal of PPE or other long term
assets
assets are NOT presented in the CFI, but in gain or loss.
CF A CFF
Review long-term
Increases supply cash and decrease use cash.
debt and stock
37-50
CF/S ratio
Performance ratios Coverage ratio
CFO/Revenue CFO/Total debt
CFO/Average total assets CFO/Cash paid for long- term assets
A
CFO/Average total equity CFO/Cash long- term debt repayment
CFO/Operating income CFO/dividend paid
CF
(CFO Preferred dividends ) / Weighted
CFO/ Cash outflows from investing and
CF A
average number of common shares financing activities
39-50
Ratio analysis
Common size analysis
Stack column graph
Graphical analysis
Line graph
Regression analysis
Ratio analysis
1. Activity ratio
CF A
Inventory
Inventory turnover
A/R
Receivables turnover
A/P
Payables turnover
= COGS/ average inventory
CF A = Net revenue / average A/R = Purchase / average A/P
period
Average inventory processing Average receivables
= 365 / inventory turnover
collection period
= 365 / receivables turnover
Average payment period
= 365 / payables turnover
CF A
3. Solvency Ratios (A firms ability to pay long-term debt)
Debt to equity ratio D/E
Debt to capital D/(D+E)
Leverage
Debt- to assets D/A
Financial leverage A/E
Interest coverage EBIT/ Interest
Coverage (EBIT + lease payment)/( Interest + lease
Fixed charge coverage
payments)
41-50
4. Profitability Ratios (A firms ability to generate profits)
Gross profit margin Gross profits / net revenue
Profit / Net Operating profit margin EBIT / net revenue
revenue Pretax margin EBT / net revenue
Net profit margin NI / net revenue
A
ROA [NI + interest (1-t)] /average total assets
Operating return on assets
CF
EBIT / average total assets
Return on total capital (ROTC) EBIT / average total capital
A
Profit / Capital
ROE
CF NI / average total equity
Return in common equity
(NI Preferred Dividend) / average
common equity
42-50
5. Valuation ratios
rationEquity P/E P/CF P/B P/S
Equity Net income per employee
analysis Growth in same-store sales
Sales per square foot
Interest coverage ratio
C
EBIT / Interest
F A
Credit Return in capital
EBIT / average total capital
analysis
F A
Debt to asset ratio
C
D/A
Z- score
CV sales
Z = 1.2A+1.4B+3.3C+0.6D+1.0E
Sales / mean sales
Business Operating income / mean operating
CV operating income
risk income
NI / mean NI
CV net income
43-50
R29 CF A
CF A
Inventories
44-50
Capitalizing B/S
A
Expensing I/S
CF
Purchase cost less trade discounts and
rebates.
Abnormal waste of materials, labor, or
overhead.
CF A
Conversion costs including labor and Storage costs (unless required as part of
overhead.
Other costs necessary to bring the
production).
Administrative overhead.
inventory to its present location and Selling costs
condition.
45-50
CF A
Weighted average cost
CF A
Inventory COGS
Periodic perpetual system
FIFO and specific identification
InventoryCOGS
Periodic or perpetual system
LIFO and weighted average cost
46-50
LIFO FIFO
LIFO FIFOLIFO
COGS Higher Lower
Taxes Lower Higher
EBIT&EAT Lower Higher
CF A
Inventory balances
Cash flows
Lower
HigherTax
Higher
Lower
CF A
CF
Net and gross margins Lower Higher
Current ratios Lower Higher
Inventory turnover Higher Lower
D/A and D/E HigherINVA; Lower
COGSNIE
47-50
CF A
US GAAP
Cost vs Market (which is lower)
CF A
NRV-normal profit margin<replacement cost<NRV
Retrospectively
LIFO Prospectively
48-50
R30Long-Lived Assets
Capitalize or expense
Expense I/SCFO
C F A
Depreciation Impairment
Interest Capitalizing R&D Cost
Leases
CF A
Yes
Current assetsInventoryCOGS
Tangible
depreciation
B/S Non- assets
current
Spending assets Intangible
Amortization
Expenditure assets
No
I/S I/S
49-50
51CFA
CFA CFA
CF A
CF A
CFA
50-50