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This document provides an overview of key concepts in financial statement analysis. It discusses notes to the financial statements, management discussion and analysis, types of audit opinions, and the accounting equation. It also covers accounting methods like FIFO and LIFO, methods of depreciation, classifications of unusual items, and calculations of earnings per share. Additional topics include inventory valuation under IFRS and US GAAP, treatment of goodwill, classifications of investments, and calculations of cash flows from operating, investing, and financing activities.

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68 views4 pages

Fsa

This document provides an overview of key concepts in financial statement analysis. It discusses notes to the financial statements, management discussion and analysis, types of audit opinions, and the accounting equation. It also covers accounting methods like FIFO and LIFO, methods of depreciation, classifications of unusual items, and calculations of earnings per share. Additional topics include inventory valuation under IFRS and US GAAP, treatment of goodwill, classifications of investments, and calculations of cash flows from operating, investing, and financing activities.

Uploaded by

api-294072125
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Statements Analysis

Financial statement notes: discuss basis of presentation; info about methods; assumptions;
assessments; estimates; info on acquisitions; disposals; legal actions; employee benefits; contingency;
commitments; customers; sales; etc.
MD & A: Nature of business; past performance, future outlook; trends; events; uncertaintys about
liquidity; capital, results, etc.
Audit: Unqualified Opinion, qualified opinion (exceptions); adverse (not fair of non-conforming);
disclaimer of opinion (none)

Assets = Liabilities + contributed capital + beg, retained earnings + revenue expense dividends
Flow of transactions = Journal; ledger; trial balance, balance
FIFO; LIFO; WAC
Depreciation:
STR-8 line = (cost residual value) / useful life;

double declining = (2/useful life) * cost accum dep.

Unusual or infrequent items are included in continuing operations (before tax) (Gains or losses on asset
sales, impairments, write-offs)
Discontinued Operations: reported separately on IS, below income from continuing operations, net of
tax;
Extraordinary: Are both unusual and infrequent; Reported separately in IS net-of tax below continuing
operations (US GAAP ONLY); IFRS does not allow to be separated from operating results in IS.
Comprehensive Income: NI + Other; measures all s to equity other than transactions with shareholders
in principle: requires retrospective application
in estimate does not require re-statement of prior periods

EPS basic = (NI preffered div.) / weighted avg # of common shares


EPS diluted = (NI preferred div) + (converted prefferd div) + (Convert debt interest )(1- tax)
Weighted avg common + shares from conv pref + shares from conv. Debt + share Increase from options

Inventories:
IFRS: Inventories are recorded at the lower of cost of Net realizable value;
Net Realizable value = selling price completion $ selling costs
US GAAP: Lower of cost of Market value;
Market value = replacement cost (not higher than Net Realizable Value)
If NRV (IFRS) or MV (GAAP) are lower than carrying cost, inventory is written down & the loss is
recognized in IS. It can only be written back up in IFRS.

Goodwill = excess of purchase price over Face Value of Assets Liabilities


Held to Maturity securities are measured at amortized cost
Trading Secs: measured @ fair value (gains / losses -> IS)
Available for Sale: measured @ fair value (gains;losses -> other comprehensive income s in SE)

CFO; CFI; CFF


CFI: inflows & outflows -> acquisitions / disposals of long term assets and some investments
CFF: inflows/outflows of transactions affecting capital structure
CFO:
Indirect:
1 NI; 2 add / sub s related to CFI and CFF ; 3 Add non-cash items (Dep,ammort, etc); 4 add/sub
s in balance sheet accounts
Direct: 1 Net Sales; 2 add/sub s from A/R from indirect CFO; 3 add/sub s in unearned revenue;
4 COGS; 5 dep or ammort incl. must be removed (added) ; 6) adjust COGS by s in A/P.; 7 - s in
INV. 8 remove inv write offs
FCFF = NI + NCC + (Int X (1-tax)) FCInv Wcinv
FCFF = CFO + (Int x (1-tax)) Fcinv
FCFE = CFO FCI + Net borrowing

COGS = beg inv + purchases end inv


Product costs (capitalized) = purchase cost (less disc & rebates) + conversion costs (incl labor; overhead)
Period costs (expensed) = abnormal waste; storage; admin; selling costs;
Perpetual inventory = values updated constantly;

Periodic Inv = values determined @ end of period

IFRS -> Inventory reported on BS @ lower of cost of Net realizable Value


Net Realize Value = expected sales price less selling & completion costs;
If written down, loss recognized in IS. If recovery, Inv can be written back up & Gain recognized in IS by
reducing COGS by the recovered amount; Cannot be written back up beyond original amount written .
GAAP -> Reported @ lower of cost or Mkt Value; Mkt Value = replacement cost, but cannot be higher
than NRV of less than NRV minus normal profit margin.
LIFO Reserve = FIFO Inv LIFO inv; FIFO Inv = LIFO Inv + Lifo Reserve
LIFO COGS = FIFO COGS LIFO Reserve

Expenses can only be CAPITALIZED if they will provide a future economic benefit (beyond one year?)
Goodwill = excess of purchase price over fair value of Net Assets
R&D :
IFRS: Research Expensed; Development Capitalized; GAAP: both R&D expensed (Exception software)

Income Tax expense = taxes payable + DTL DTA


If tax base > carrying value & a reversal is expected -> DTA created.

Interest Expense: book value @ beg of period X yield @ ISSUANCE!


Premium bond: Interest expense < coupon payment (yield < coupon); Interest expense will decrease
over time as liability decreases.
Discount Bond: interest expense > coupon payment (yield > coupon); interest expense will increase over
time as liability increases.

Finance Lease (Capital Lease): Purchase of an asset, financed with debt. Record equal amount as A&L;
depreciate & interest accordingly
Operating Lease (Rental Agreement): No asset or Liability (rental expense only)
Synthetic Lease = treated as ownership on tax reporting (deprectiation and interest expensed) but
treated as a rental agreement for financial reporting (no balance sheet liability)

Lessors Perspective you might ask? Here we go


Sales Type Lease VS Direct Financing Lease
US GAAP
Sales Type -> If PV of lease payments exceeds carrying value of asset.
Direct Finance -> PV of lease payments in equal to carrying value of asset
IFRS -> does not distinguish difference,
Sales Type ->

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