Introduction to Financial Statement Analysis, Exams of Financial Statement Analysis

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Introduction to Financial

Statement Analysis

"Information about a company's objectives, strategies, and significant risks are most likely to be found in the: A: auditor's report. B: management commentary. C: notes to the financial statements. - CORRECT ANSWER B is correct. These are components of management commentary." "Which of the following reports is least likely to be filed with the US SEC? A. Annual report B. Form 10-K C. Proxy Statement - CORRECT ANSWER A is correct because the annual report is not a requirement of the US SEC." "Common-size financial statements are most likely a component of which step in the financial analysis framework? A: Collect data B: Analyze/interpret data C: Process data - CORRECT ANSWER C is correct. Preparing common-size financial statements is part of the process data step. ie input of processing data" "Where might an analyst look for details covering the full extent of a company's capital resources? A: Balance sheet B: Notes to the financial statements C: Management discussion and analysis (MD&A) - CORRECT ANSWER C is correct In the MD&A, management must highlight any favorable or unfavorable trends and identify significant events and uncertainties that affect the company's liquidity, capital resources, and results of operations. The MD&A must also provide information about off-balance-sheet obligations and about contractual commitments, such as purchase obligations." "The role of the International Organization of Securities Commissions (IOSCO) is best described as: A: promoting cross-border cooperation and uniformity in securities regulation. B: enforcing financial reporting requirements for entities participating in capital markets. C: promoting the use of International Financial Reporting Standards (IFRS) and the convergence of national accounting standards. - CORRECT ANSWER A is Correct

• reducing systemic risk." "US Securities and Exchange Commission (US SEC) - CORRECT ANSWER Has primary responsibility for securities and capital markets regulation in the United States and is an ordinary member of IOSCO." "Significant statutes enforced by SEC - CORRECT ANSWER Securities Act of 1933 Securities Exchange Act of 1934 Sarbane-Oxley Act of 2002" "Securities Act of 1933 - CORRECT ANSWER This law specifies the financial and other significant information that investors must receive when securities are sold, prohibits misrepresentations, and requires initial registration of all public issuances of securities." "Securities Exchange Act of 1934 - CORRECT ANSWER Gave the SEC authority over all aspects of the securities industry, and empowered the SEC to require periodic reporting by companies with publicly traded securities." "Sarbanes-Oxley Act of 2002 - CORRECT ANSWER This act created the Public Company Accounting Oversight Board, which addresses:
• auditor independence and strengthens corporate responsibility for financial reports
• Internal controls over financial reporting must also be reported." "Securities Offering Registration Statement - CORRECT ANSWER - This relates to new securities offerings and is required by the 1933 Act.
• Must be disclosed to SEC by listed company" "Forms 10-K (US Companies) , 20-F (Certain Canadian companies), and 40-F (Non-US Companies) - CORRECT ANSWER - These forms require a comprehensive overview, including information concerning a company's business, risk factors, financial disclosures, legal proceedings, and information related to management.
• The financial disclosures include audited financial statements and notes, management discussion and analysis (MD&A) of the company's financial condition and results of operations, and auditors' reports.
• Must be disclosed to SEC by listed company" "Proxy Statement/Form DEF-14A - CORRECT ANSWER Shareholders must be sent a proxy statement prior to a shareholder meeting. A proxy form allows a shareholder gives to transfer their right to vote.
• Must be disclosed to SEC by listed company"

"8K - CORRECT ANSWER This must be filed for major events such as acquisitions and matters related to accounting and financial statements.

• Must be disclosed to SEC by listed company" "11-K - CORRECT ANSWER This is the annual report of employee stock purchase, savings, and similar plans
• Must be disclosed to SEC by listed company" "Importance of financial statement notes and supplementary information - CORRECT ANSWER - The notes are essential for understanding financial statements as they disclose information such as accounting policies, methods, and estimating procedures.
• financial notes and supplemental schedules provide explanatory information about every line item (or almost every line item) on the balance sheet and income statement." "Importance of management's commentary - CORRECT ANSWER - Is a good starting place for understanding information in the financial statements.
• Forward-looking disclosures, s can be useful in projecting a company's future performance.
• However, the commentary is only one input for the analyst seeking an objective and independent perspective on a company's performance and prospects." "Auditors reports - CORRECT ANSWER A report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles." "Objectives of an auditor in conducting an audit of financial statements under International standards on auditing (ISA) - CORRECT ANSWER - to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
• to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor's findings." "Opinions expressed by auditor - CORRECT ANSWER Unqualified
• States the financial statements give a true and fair view. Qualified audit -Point out limitations or exceptions to the accounting standards. Adverse
• Issued when the statements materially depart from accounting standards.

Proprietary primary research (eg. surveys, conversations)" "Accounting policies, methods, and estimates used in preparing financial statements are most likely to be found in the: A: auditor's report. B: management commentary. C: notes to the financial statements - CORRECT ANSWER C is correct. The notes disclose choices in accounting policies, methods, and estimates." "Information about management and director compensation is most likely to be found in the: A: auditor's report. B: proxy statement. C: earnings release. - CORRECT ANSWER B is correct. Disclosure of management compensation is typically included in the proxy statement." "According to the international standards for auditing (ISA), the objectives of auditors in conducting an independent audit of a company's financial statements are least likely to include: A: cooperating fully with the issuer. B: reporting on the financial statements. C: determining whether the financial statements are free from material misstatement. - CORRECT ANSWER A is correct According to the ISA, the two objectives of auditors are:

1. Obtaining reasonable assurance that the financial reports are free from material misstatement attributable to either fraud or error, and;
2. Issuing a report based on their findings Cooperating too closely with the firm being audited may compromise an auditor's independence." "A qualified audit opinion is most likely required: A: for a company with related-party transactions. B: when the scope of the auditing process has not been limited. C: in financial statements for the quarter after a major accounting policy change is implemented. - CORRECT ANSWER C is correct.

A qualified opinion identifies parts of the financial statement that might not have been prepared in accordance with relevant laws and standards. This can occur after the implementation of a major accounting policy change. If the auditing process has been limited, the audit opinion is more likely to be qualified. An unqualified opinion is more likely given when the scope of the audit process has not been limited. While related-party transactions should be analyzed, their existence is not a barrier to issuing an unqualified opinion that financial statements have been prepared in accordance with the appropriate financial reporting framework." "For companies with shares that trade on US exchanges, the inclusion of management's commentary on the company's financial outlook in the annual financial statements is most likely: A: recommended, but not required. B: required and must adhere to specific guidelines for content. C: required, but management has complete discretion over which content is included. - CORRECT ANSWER B is correct. The Securities and Exchange Commission (SEC) requires companies with publicly- listed shares to included management's commentary on matters such as the nature of the business, recent performance, and factors that may affect future performance. The SEC specifies which content must be included in this commentary." "A credit analyst is least likely to analyze a company's financial statements for the purpose of: A: assigning a credit rating. B: determining the appropriate terms for a loan. C: determining whether the company's shares are trading at a price below their intrinsic value. - CORRECT ANSWER C is correct. Credit analysts typically work for banks or other financial institutions that consider whether to extend loans to companies and, if so, on what terms. Another common function of credit analysts is to assign credit ratings that can significantly influence the interest rate at which a company can borrow (as well as other borrowing terms). Credit analysts are primarily concerned with assessing a company's ability to meet its fixed- income obligations. Whether the company's share price is at, above, or below its intrinsic value is a secondary concern at most to this type of analyst (although it is a primary concern for equity analysts)." "Subzero Corporation is currently involved in a legal dispute with one of its customers. The company's legal counsel has advised that a potential loss from the dispute is

Output

• Financial statements and other quantitative data in a usable form, such as a spreadsheet." "Third step of financial statement analysis and sources of information and output - CORRECT ANSWER Process data Sources of information
• Financial statements
• Industry reports
• Dicussions with industry experts Output
• Adjusted financial statements
• Common-size statements
• Ratios, graph" "Fourth step of financial statement analysis and sources of information and output - CORRECT ANSWER Analyze/interpret data Sources of information
• Data collected from second step of financial statement analysis
• Outputs from third step of financial statement analysis Output
• Analytical results
• Forecasts
• Valuations"