Analysis of Financial Statements

Financial Statement Analysis: An Introduction

Presented by: Ali Dhamani

Financial Reporting
Financial reporting refers to the way companies show their financial performances to investors, creditors, and other interested parties by preparing and presenting financial statements. The role of Financial reporting is described by the International Accounting Standard Board (IASB) in its Framework for Preparation & Presentation of Financial Statements: The objective of financial statements is to provide information about the financial position, performance and change in financial position of any entity that is useful to a wide range of users in making economic decisions

Financial Statement Analysis

The role of Financial Statement Analysis is to use the information in a companys financial statements, along with other relevant information, to make economic decisions. Examples of such decisions include;
Whether to invest in the companys securities or not, whether to extend trade or bank credit to the company etc

Analysts use financial statement data to evaluate a company past performance and current financial position in order to form opinions about the companys ability ear profit and generate cash flow in the future.

What sort of analysis we do;

Investment Analysis. Mergers Subsidiaries Credit Worthiness

Financial Reports
Income Statement
Profit = Revenue Expenses

Balance Sheet
Asset = Liabilities + Owners Equity

Cash Flow Statement

Operating, Investing & Financing

Statement of Changes in Owners Equity

Other Documents
Financial Statement Notes (foot notes) Supplementary Schedules MD & A

Other Sources of Information

Quarterly or semiannual reports.
Interim financial reports Not audited

Proxy statements
Matters that are put up for votes Board members, compensation & qualifications Stock performance Potential conflicts of interest

Audit & Internal Control

What is audit?
Examination by independent accounting firm

Audit Reports
Unqualified opinion (reasonable assurance that financial statements are fairly presented) Qualified Opinion (some limitations or exception to accounting standards) Adverse Opinion (dont not appropriately reflect company performance)

Internal Controls (helps to ensure that company process of generating report is sound)

Financial statement analysis framework

Consist of six steps:

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2)

3)

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6)

Sate the objective and context: Determine what questions the analyst seeks to answer, the form in which this information needs to be presented, and what resources and how much time are available to perform the analysis. Gather Data: Acquire the companys financial statements and other relevant data on its industry and the economy. Ask questions of the companys management, suppliers and customers and visit company sites. Process the data: Make any appropriate adjustments to the financial statements, calculate ratios. Prepare exhibits such as graphs and common-size balance sheet. Analyze and interpret the data: Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports. Report the conclusion or recommendations: Prepare a report and communicate it to its intended audience. Be sure the report and its dissemination comply with the code and standards that relate to investments analysis and recommendations. Update the analysis: Repeat these steps periodically and change the conclusions or recommendations when necessary.