Financial Reporting & Analysis

Terms Used for Net Income

1. Net profit 2. Net earnings

Trial balance & adj. trail balance

A trial balance is a document that lists account balances at a particular point in time. Trial balances are typically prepared at the end of an accounting period as a first step in producing financial statements. A key difference between a trial balance and a ledger is that the trial balance shows only total ending balances. An initial trial balance assists in the identification of any adjusting entries that may be required. Once these adjusting entries are made, an adjusted trial balance can be prepared.

Accrued expenses

Arise when a company incurs expenses that have not yet been paid as of the end of an accounting period. As with accrued revenues, accrued expenses specifically relate to end- of- period accruals. Accounts payable are similar to accrued expenses in that they involve a transaction that occurs now but the cash payment is made later. Accounts payable is also a liability but often relates to the receipt of inventory (or perhaps services) as opposed to recording an immediate expense. Accounts payable should be listed separately from other accrued expenses on the balance sheet because of their different nature.

Unbilled revenue (or accrued revenue)

Arises when a company earns revenue prior to receiving cash but has not yet recognized the revenue at the end of an accounting period. The accounting treatment involves an originating entry to record the revenue earned through the end of the accounting period and a related receivable reflecting amounts due from customers. When the company receives payment (or if goods are returned), an adjusting entry eliminates the receivable. Accrued revenue specifically relates to end- of- period accruals;

Unearned revenue (or deferred revenue)

Arises when a company receives cash prior to earning the revenue.

unclassified balance sheet

Balance sheet that broadly groups assets, liabilities, and equity accounts. one that does not show subtotals for current assets and current liabilities Assets are simply listed in order of liquidity (how quickly they are expected to be converted into cash). Similarly, liabilities are listed in the order in which they are expected to be satisfied (or paid off).

Regulatory Bodies

Bodies such as the SEC that have the legal authority to enforce financial reporting requirements

Audit Report in the US: Sarbanes-Oxley

The auditors must also express an option on the company's internal control systems

Income Statements Consolidation

IS are presented on a consolidated basis under the parent company.

Operating Profit often called

EBIT

Debit vs. Credit balance

If left side is greater, debit balance. If right side is greater, credit balance.

IOSCO

International Organization of Securities Commissions is not an official regulatory authority but its members regulate a significant portion of the world's financial capital markets

Debit

Left side of a T account corresponding to assets. An increase, debit, is indicated on the left side of the T account and an decrease is on the right side.

Expense account increased

Means the account was debited

Indirect Format

With reference to cash flow statements, a format for the presentation of the statement which, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flow. Also called indirect method.

Direct Format

With reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash receipts less operating cash disbursements. Also called direct method.

Investing activities

are those activities associated with acquisition and disposal of long- term assets.

How Analysts Process Data

processing the data may involve computing ratios or growth rates; preparing common-size financial statements; creating charts; performing statistical analyses, such as regressions or Monte Carlo simulations; performing equity valuation; performing sensitivity analyses; or using any other analytical tools or combination of tools that are available and appropriate for the task

Collect Data Top Down Approach

1) gain an understanding of the macroeconomic environment, such as prospects for growth in the economy and inflation, 2) analyze the prospects of the industry in which the subject company operates based on the expected macroeconomic environment, and 3) determine the prospects for the company in the expected industry and macroeconomic environments.

Common Contra Accounts

1. Allowance for bad debts (offsets account receivable) 2. Accumulated depreciation (offset cost of PPE) 3. Sales returns and allowances (offset to revenue reflecting cash refunds, credits on account, and discounts from sales prices)

Standard-setting Bodies for Accounting

1. IASB: international accounting standards body 2. FASB: US accounting standards body

Accounting System Flow & Documents

1. Journal entries and adjusting entries 2. General ledger and T-accounts 3. Trail balance and adjusted trial balance 4. Financial statements

Components of Owner's Equit

1. Paid in Capital: increase is an issuance of equity and an example is a stock issuance and a decrease would be a stock purchase 2. Retained Earnings: include the cumulative amount of company's profits retained in teh company

Operating Profit Increased by

1. Profits generated by other investments 2. Profits from financial activities 3. Decreased by finance costs

Three Objectives of IOSCO

1. Protecting investors 2. Ensuring that markets are fair, efficient, and transparent 3. Reducing systemic risk

Terms Used to Denote Owner's Equity

1. Shareholder's equity 2. Stockholder' s equity 3. Net assets 4. Equity 5. Net book value 6. Partners capital

allowance for bad debts

A contra asset account, related to accounts receivable, that holds the estimated amount of uncollectible accounts.

Journal entries & adjusting entries

A journal is a document or computer file in which business transactions are recorded in the order in which they occur (chronological order). The general journal is the collection of all business transactions in an accounting system sorted by date.

unearned fees (or unearned revenue)

A liability account showing money has been received, but product has not been delivered. Once the product is delivered, unearned fees will go to revenue

Accrued Revenue

A revenue that has been earned but for which the cash has not yet been collected. This usually occurs when an accounting period ends prior to a company billing its customer. \

Slovency

Ability to meet long term obligations

`Liquidity

Ability to meet short term obilgations

Retained Earnings Equation

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings Ending Retained Earnings = Begining retained earnings + Net income - dividends

Other Sources of Information

Companies provide information on management and director compensation, company stock performance, and potential conflicts of interest that may exist b/t management, the board, and shareholders

Diluted Earnings per Share

Earnings per share calculation that requires dilutive securities be added to the denominator of the basic EPS calculation. the number of shares that would hypothetically be outstanding if potentially dilutive claims on common shares (e.g., stock options or convertible bonds) were exercised or converted by their holders—and an appropriately adjusted profit or loss attributable to the common shareowners.

Basic Earnings per Share

Net income less any preferred dividends and then divided by weighted-average common shares outstanding. Basic earnings per share is calculated using the weighted-average number of common (ordinary) shares that were actually outstanding during the period and the profit or loss attributable to the common shareowners

Owner's Equity Equation

Owner's equity = contributed capital + retained earnings

Income Statement Equation

Revenue - Expenses = Net Income (Loss)

CFA Standards that must be followed when making a reccomendation

Standard V(B) states that members and candidates should communicate in a recommendation the factors that were instrumental in making the investment recommendation. A critical part of this requirement is to distinguish clearly between opinions and facts. In preparing a research report, the member or candidate must present the basic characteristics of the security(ies) being analyzed, which will allow the reader to evaluate the report and incorporate information the reader deems relevant to his or her investment decision making process.9

Common Accounts: Liabiliites

■ Accounts payable, trade payables ■ Provisions or accrued liabilities ■ Financial liabilities ■ Current and deferred tax liabilities ■ Reserves ■ Unearned revenue ■ Debt payable ■ Bonds (payable) ■ [for banks, Deposits]

Common Accounts: Owner's Equity

■ Capital, such as common stock par value ■ Additional paid- in capital ■ Retained earnings ■ Other comprehensive income ■ Minority interest

Common Accounts: Assets

■ Cash and cash equivalents ■ Accounts receivable, trade receivables ■ Prepaid expenses ■ Inventory ■ Property, plant, and equipment ■ Investment property ■ Intangible assets (patents, trademarks, licenses, copyright, goodwill) ■ Financial assets, trading securities, investment securities ■ Investments accounted for by the equity method ■ Current and deferred tax assets ■ [for banks, Loans (receivable)]

Common Accounts: Expense

■ Cost of goods sold ■ Selling, general, and administrative expenses "SG&A" (e.g., rent, utilities, salaries, advertising) ■ Depreciation and amortization ■ Interest expense ■ Tax expense ■ Losses

Common Accounts: Revenue

■ Revenue, sales ■ Gains ■ Investment income (e.g., interest and dividends)

SEC: Securities Exchange Act of 1934

This act created the SEC, 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.

SEC: Securities Act of 1933

This act 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.

Statement of Comprehensive Income

Under IFRS comprehensive income may be reported as a single statement of comprehensive income or as two statements, an income statement and a statement of comprehensive income that begins with profit or loss from the income statement.

Valuation adjustments summary

Where valuation adjustment entries are required for assets, the basic pattern is the following for increases in assets: An asset is increased with the other side of the equation being a gain on the income statement or an increase to other comprehensive income. Conversely for decreases: An asset is decreased with the other side of the equation being a loss on the income statement or a decrease to other comprehensive income.

Account

individual records of increases and decreases in a specific asset, liability, component of owners' equity, revenue, or expense.

Typical Financial Note Disclosure

1. financial instruments and risks arising from financial instruments, 2. commitments and contingencies, 3. legal proceedings, 4. related-party transactions, 5. subsequent events (i.e., events that occur after the balance sheet date), 6. business acquisitions and disposals, and 7. operating segments' performance.

Financial Flexibility

Ability of a company to react and adapt to financial adversities and opportunities

IS Revenue

Refers to the amounts charged for delivery of goods and services in the ordinary activities of a business.

Other Receivables

Represent amounts owed to company from suppliers (such as returns of merchandise)

Equation of Income Statement

Revenue + Other Income - Expenses = Income - Expenses = NI

Elements of Operating Activity

Sales of goods and services to customers: (R) ■ Costs of providing the goods and services: (X) ■ Income tax expense: (X) ■ Holding short- term assets or incurring short- term liabilities directly related to operating activities: (A), (L)

SEC: Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB) to oversee auditors. The SEC is responsible for carrying out the requirements of the act and overseeing the PCAOB. The act addresses auditor independence; for example, it prohibits auditors from providing certain non-audit services to the companies they audit. The act strengthens corporate responsibility for financial reports; for example, it requires the chief executive officer and the chief financial officer to certify that the company's financial reports fairly present the company's condition. Furthermore, Section 404 of the Sarbanes-Oxley Act requires management to report on the effectiveness of the company's internal control over financial reporting and to obtain a report from its external auditor attesting to management's assertion about the effectiveness of the company's internal control.

Indirect Cash Flow

The indirect method emphasizes the different perspectives of the income statement and cash flow statement. On the income statement, income is reported when earned, not necessarily when cash is received, and expenses are reported when incurred, not necessarily when paid. The cash flow statement presents another aspect of performance: the ability of a company to generate cash flow from running its business. Ideally, for an established company, the analyst would like to see that the primary source of cash flow is from operating activities as opposed to investing or financing activities.

FASB Accounting Standards Codification

a compilation of all standards and other elements of US GAAP into a single searchable database that is organized by topic to make it easy to research financial reporting issues

Develop & Communicate Conclusions/Reccomendations

an equity analyst's report would typically include the following components: 1. summary and investment conclusion; 2. earnings projections; 3. valuation; 4. business summary; 5. risk, industry, and competitive analysis; 6. historical performance; and 7. forecasts.

Elements of Financing Activity

Issuance or repurchase of the company's own preferred or common stock: (E) ■ Issuance or repayment of debt: (L) ■ Payment of distributions (i.e., dividends to preferred or common stockholders): (E)

Financing activities

those activities related to obtaining or repaying capital. T he two primary sources for such funds are owners (shareholders) or creditors. Examples include issuing common shares, taking out a bank loan, and issuing bonds.

Statement of Changes in Equity

Serves to report the changes in owner's investment over time

Owner's Equity

The owner's residual claim on the company

Companies Financial Statements

Should be comparable when they have identical transactions

IASB Process

An issue is identified as a priority for consideration and placed on the IASB's agenda in consultation with the Advisory Council. After considering an issue, which may include soliciting advice from others including national standard-setters, the IASB may publish an exposure draft for public comment. In addition to soliciting public comment, the IASB may hold public hearings to discuss proposed standards. After reviewing the input of others, the IASB may issue a new or revised financial reporting standard. These standards are authoritative to the extent that they are recognised and adopted by regulatory authorities.

Accrual Accouting

Accrual accounting requires that revenue be recorded when earned and that expenses be recorded when incurred, irrespective of when the related cash movements occur

Trustees of IFRS

Appoint the members of the IASB. The IASB must approve interpretations of accounting issue decisions formed by the IFRS

Prepaid expense

Arises when a company makes a cash payment prior to recognizing an expense. The accounting treatment involves an originating entry to record the payment of cash and the prepaid asset reflecting future benefits, and a subsequent adjusting entry to record the expense and eliminate the prepaid asset

Statement of Retained Earnings

Shows the linkage b/t the balance sheet and income statement

contra account

An account with a balance that is opposite, or "contra," to that of its related accounts.

Asset vs Expense

An asset will be used over multiple periods but an expense is for that period

Expanded Accouting Equation

Assets = liabilities + contributed capital + ending retained earnings Which becomes, Assets = liabilities + contributed capital + begining retained earnings + revenue - expenses - dividends

Audit Report

Auditor provides written opinion

Deferred vs Accrued revenue

Deferred revenue refers to revenue that has been received but goods and services have not been provided. It is an asset. Accrued revenue refers to situations in which a product or service has been received but the cash has not been collected. It is a liability.

Valuation Adjustments

In contrast to accrual entries that allocate revenue and expenses into the appropriate accounting periods, valuation adjustments are made to a company's assets or liabilities—only where required by accounting standards—so that the accounting records reflect the current market value rather than the historical cost.

Other Comprehensive Income (OCI)

Includes all items that impact owner's equity but are not the result of transactions w/ shareholders

Credit

Increase in liabilities on the right side, and decrease on the left.

Management Commentary

Information about a company's objectives, strategies and significant risks would most likely be found in the: Names it goes by are: management report(ing), management commentary, operating and financial review, and management's discussion and analysis Remember to check if management report is audited or unaudited

Securities & Exchange Commission (SEC)

Primary responsibility is regulation of securities and capital markets in the US and is a member of IOSCO

Elements of Investing Activity

Purchase or sale of assets, such as property, plant, and equipment: (A) ■ Purchase or sale of other entities' equity and debt securities: (A)

SEC

Rarely overrules the FASB, but it does issue authoritative financial reporting guidance including Staff Accounting Bulletins SEC officially recognizes US GAAP

Gains or Losses

Refer to increases or decreases in resources that are not part of a company's primary business activities

International Accounting Standards Board

The IASB is the independent standard-setting body of the IFRS Foundation,5 an independent, not-for-profit private sector organization.

Desirable Attributes of Accounting Standards Boards

The organization should have adequate authority, resources, and competencies to fulfill its responsibilities. The processes that guide the organization and the formation of standards should be clear and consistent. The accounting standards board should be guided by a well-articulated framework with a clearly stated objective. The accounting standards board should operate independently, seeking and considering input from stakeholders but making decisions that are consistent with the stated objective of the framework. The decision-setting process should not be compromised by pressure from external forces and should not be influenced by self- or special interests.

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States. The Financial Accounting Foundation oversees, administered, and finances the organization The foundation appoints members of the FASB and the Financial Accounting Standards Advisory Council

Direct Cash Flow

This method discloses major classes of gross cash receipts and gross cash payments

IFRS & IASB Require Following in Management Commentary

1) the nature of the business; 2) management's objectives and strategies; 3) the company's significant resources, risks, and relationships; 4) results of operations; and 5) critical performance measures

Financial Statement Analysis Framework

1. State the objective and context 2. Gather data 3. Process the data 4. Analyze and interpret the data 5. Report the conclusions or recommendations 6. Update the analysis

Names for Income Statement

1. Statement of Operations 2. Statement of Income 3. Statement of Profit and Loss

Objective of Auditor According to ISA

1. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and 2. To report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor's findings.

Types of Auditor Opinions

1. Unqualified: means everything looks good and the financials may be trusted 2. Qualified: there exists some scope limitation or exception to accounting standards. Exceptions are further described so the analyst may judge its importance 3. Adverse: simply untrustworthy and don't bother reading 4. Disclaimer of opinion: for some reason, such as a scope limitation, the auditors are unable to issue an opinion.

General ledger & T-accounts

A ledger is a document or computer file that shows all business transactions by account. Note that the general ledger, the core of every accounting system, contains all of the same entries as that posted to the general journal—the only difference is that the data are sorted by date in a journal and by account in the ledger

Operating activities

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. those activities that are part of the day- to- day business functioning of an entity.

IS Other Income

Includes gains that may or may not arise in normal activities of business

Cash Equivalents

Liquid short term investments usually maturing in 90 days or less

US Requires Management Commentary or MD&A to have

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 the effects of inflation, changing prices, or other material events and uncertainties that may cause the future operating results and financial condition to materially depart from the current reported financial information. In addition, the MD&A must provide information about off-balance-sheet obligations and about contractual commitments such as purchase obligations. Companies should also provide disclosure in the MD&A that discusses the critical accounting policies that require management to make subjective judgments and that have a significant impact on reported financial results.

Income Statement & Minority Interest

Minority interests, also called non-controlling interests, refer to owners of the remaining shares of the subsidiary that are not owned by the parent. The share of consolidated net income attributable to minority interests is shown at the bottom of the income statement along with the net income attributable to shareholders of the parent company.

IASB Objective

The principle objectives of the IFRS Foundation are to develop and promote the use and adoption of a single set of high quality financial standards; to ensure the standards result in transparent, comparable, and decision-useful information while taking into account the needs of a range of sizes and types of entities in diverse economic settings; and to promote the convergence of national accounting standards and IFRS.