• Provide information about a company’s financial performance,financial position and changes in financial position.• Inclu...
• There are 4 basic financial statements:- Statement of Financial Position- Statement of Comprehensive Income- Statement o...
• The following equation represents relation between threecomponents of the Balance Sheet:Assets = Liabilities + Owner’s E...
• The equation of the Income Statement is:(Revenue + Other Income) – Expenses= Income – Expenses= Net IncomeStudy Session ...
• The notes to the financial statements (also called footnotes) arean integral part of the financial statements and help u...
• The disclosure of notes relating to policies, methods andestimates help analysts compare the financial statements ofdiff...
•In the management commentary section of the annual reportsof public traded companies, various issues such as nature ofbus...
• Financial statements of companies are required to be audited inaccordance with specific auditing standards.• A written o...
• Unqualified or clean audit opinion• Qualified audit opinion• Adverse opinion• Disclaimer of opinionStudy Session 7, Read...
• While undertaking analysis, analysts also consider otherinformation provided by management and information fromexternal ...
• Industry• Economy• Peer companies.Study Session 7, Reading 22
• Explaining the purpose and context of analysis• Explaining the purpose and context of analysis• Processing Data• Analysi...
Classification of Business Activities• Operating Activities• Investing Activities• Financing ActivitiesStudy Session 7, Re...
• Assets• Liabilities• Owner’s Equity• Revenue• Expenses.Study Session 7, Reading 23
• The Basic Accounting Equation that underlies the balance sheet isAssets = Liabilities + Owner’s Equity• The expanded acc...
Accounting Equations Owner’s Equity can be shown by the equationOwner’s Equity = Contributed Capital + Retained Earnings...
• The accounting process involves recording business transactions insuch a way that periodic financial statements can be p...
• Identifying the affected account, amount and whether there isincrease or decrease.• Determining the element type of acco...
• Revenues should be recorded when earned and expenses shouldbe recorded when incurred irrespective of when the cash relat...
• Deferred revenue• Accrued revenue• Prepaid expenses• Accrued expensesStudy Session 7, Reading 23
• The equation underlying retained earnings can be representedas:Ending Retained Earnings= Beginning Retained Earning + Ne...
• Income Statement equation:Assets = Liabilities + Contributed Capital + Ending RetainedEarningsorAssets = Liabilities + C...
• The flow of information in an accounting system involves thefollowing steps:• Journal entries and adjusting entries• Gen...
• Financial reports that are used by analysts in security valuation,equity analysis, and credit analysis.Study Session 7, ...
• Include financial statements and other supplementarydisclosures.• Describe principles that should be used in preparing f...
• To provide financial information• Requires a company to choose from different policies andestimates• Try to ensure consi...
• International Accounting Standard Board (IASB)• Financial Accounting Standards Board (FASB).• Securities and Exchange Co...
• Should be clearly defined• Should be independent and should not be under the influence ofpressure from external sources....
• To protect investor’s interests, ensuring transparency andefficiency in markets and reducing systematic risk.• To ensure...
• The IASB, FASB and other standard setters are trying to achieveconvergence of financial reporting standards across the g...
• Differences in institutional, regulatory, cultural and thebusiness environment,• Changes.• political pressure• Enforceme...
• The conceptual framework is helpful in:–Assisting standard setters–Guiding preparers–Helping auditors–Assisting analysts...
• Relevance• Materiality• Faithful RepresentationAssumptions in Preparing Financial Statements• Accrual Accounting• Going ...
• Assets• Liabilities• Equity• Revenue• ExpensesStudy Session 7, Reading 24
• Statement of Financial Position• Single Statement of Comprehensive Income or two statements• Statement of Changes in Equ...
• Assets and liabilities should be classified as either current andnon-current.• There should be specific disclosures in t...
• Companies use either IFRS or US GAAP standard whenpreparing financial reports.• Though these two systems of standards ar...
• There should be full disclosure• Should be comprehensive• should have consistencyStudy Session 7, Reading 24
• Various bases for measuring the value of assets and liabilities.• Establishing financial reporting standards based on di...
• Though there has been advancement towards globalconvergence of financial reporting system, there are significantdifferen...
• An analyst has to monitor the following three areas:–new products or transactions.–actions of standard setters and other...
• In the notes to the financial statements and accompanyingdiscussion, companies provide information about accountingpolic...
• Changes in accounting policies may be driven by changes insome accounting standards or by the company voluntarilychangin...
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L1 flash cards financial reporting (ss7)

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L1 flash cards financial reporting (ss7)

  1. 1. • Provide information about a company’s financial performance,financial position and changes in financial position.• Include audited financial statements• Financial Statement Analysis uses financial reports of thecompanyStudy Session 7, Reading 22
  2. 2. • There are 4 basic financial statements:- Statement of Financial Position- Statement of Comprehensive Income- Statement of Changes in Equity- Statement of Cash FlowsStudy Session 7, Reading 22
  3. 3. • The following equation represents relation between threecomponents of the Balance Sheet:Assets = Liabilities + Owner’s EquityStudy Session 7, Reading 22
  4. 4. • The equation of the Income Statement is:(Revenue + Other Income) – Expenses= Income – Expenses= Net IncomeStudy Session 7, Reading 22
  5. 5. • The notes to the financial statements (also called footnotes) arean integral part of the financial statements and help users tobetter understand the financial statements.• Financial notes and supplementary schedules provideexplanatory information about almost every item in the IncomeStatement and Balance Sheet.Study Session 7, Reading 22
  6. 6. • The disclosure of notes relating to policies, methods andestimates help analysts compare the financial statements ofdifferent companies that follow different accounting methods,policies and estimates.Study Session 7, Reading 22
  7. 7. •In the management commentary section of the annual reportsof public traded companies, various issues such as nature ofbusiness, future outlook and past results are discussed.Study Session 7, Reading 22
  8. 8. • Financial statements of companies are required to be audited inaccordance with specific auditing standards.• A written opinion on the financial statements by theindependent auditor is called an Audit Report.Study Session 7, Reading 22
  9. 9. • Unqualified or clean audit opinion• Qualified audit opinion• Adverse opinion• Disclaimer of opinionStudy Session 7, Reading 22
  10. 10. • While undertaking analysis, analysts also consider otherinformation provided by management and information fromexternal sources.• Besides financial statements, notes and supplementaryinformation and auditor’s reports; the companies provide otherinformation through annual reports, press release, websites,conference calls etc.Study Session 7, Reading 22
  11. 11. • Industry• Economy• Peer companies.Study Session 7, Reading 22
  12. 12. • Explaining the purpose and context of analysis• Explaining the purpose and context of analysis• Processing Data• Analysing the processed data• Drawing & communicating conclusions• Follow-upStudy Session 7, Reading 22
  13. 13. Classification of Business Activities• Operating Activities• Investing Activities• Financing ActivitiesStudy Session 7, Reading 23
  14. 14. • Assets• Liabilities• Owner’s Equity• Revenue• Expenses.Study Session 7, Reading 23
  15. 15. • The Basic Accounting Equation that underlies the balance sheet isAssets = Liabilities + Owner’s Equity• The expanded accounting equation can be written asAssets = Liabilities + Contributed CapitalStudy Session 7, Reading 23
  16. 16. Accounting Equations Owner’s Equity can be shown by the equationOwner’s Equity = Contributed Capital + Retained Earnings The equation of the income statement isNet Income = Revenue – ExpensesStudy Session 7, Reading 23
  17. 17. • The accounting process involves recording business transactions insuch a way that periodic financial statements can be prepared.• Recording of business transactions in the accounting system isdone with the help of basic and expanded accounting equations.Study Session 7, Reading 23
  18. 18. • Identifying the affected account, amount and whether there isincrease or decrease.• Determining the element type of account affected.• Entering the amount into the appropriate column orspreadsheet.• Ensuring the accounting equation is in balance.Study Session 7, Reading 23
  19. 19. • Revenues should be recorded when earned and expenses shouldbe recorded when incurred irrespective of when the cash related tothe transaction received or paid.• The purpose of accrual accounting is to ensure that revenues andexpenses are recorded in the proper accounting period.Study Session 7, Reading 23
  20. 20. • Deferred revenue• Accrued revenue• Prepaid expenses• Accrued expensesStudy Session 7, Reading 23
  21. 21. • The equation underlying retained earnings can be representedas:Ending Retained Earnings= Beginning Retained Earning + NetIncome – DividendsStudy Session 7, Reading 23
  22. 22. • Income Statement equation:Assets = Liabilities + Contributed Capital + Ending RetainedEarningsorAssets = Liabilities + Contributed Capital + Beginning RetainedEarnings + Revenue – Expenses – DividendsStudy Session 7, Reading 23
  23. 23. • The flow of information in an accounting system involves thefollowing steps:• Journal entries and adjusting entries• General ledger and T-accounts• Trial balance and adjusted trial balance• Financial statements.Study Session 7, Reading 23
  24. 24. • Financial reports that are used by analysts in security valuation,equity analysis, and credit analysis.Study Session 7, Reading 23
  25. 25. • Include financial statements and other supplementarydisclosures.• Describe principles that should be used in preparing financialreports.Study Session 7, Reading 24
  26. 26. • To provide financial information• Requires a company to choose from different policies andestimates• Try to ensure consistency in the judgements.• Developed in accordance with a framework.Study Session 7, Reading 24
  27. 27. • International Accounting Standard Board (IASB)• Financial Accounting Standards Board (FASB).• Securities and Exchange Commission (SEC)• Financial Service Authority (FSA)Study Session 7, Reading 24
  28. 28. • Should be clearly defined• Should be independent and should not be under the influence ofpressure from external sources.• Should observe high professional standards, standards of ethics,and confidentiality.• Should be in public interestStudy Session 7, Reading 24
  29. 29. • To protect investor’s interests, ensuring transparency andefficiency in markets and reducing systematic risk.• To ensure uniform regulation across world markets.Study Session 7, Reading 24
  30. 30. • The IASB, FASB and other standard setters are trying to achieveconvergence of financial reporting standards across the globe.• With the efforts to move towards global convergence,challenges to the convergence are also becoming apparent.Study Session 7, Reading 24
  31. 31. • Differences in institutional, regulatory, cultural and thebusiness environment,• Changes.• political pressure• Enforcement is not uniform and standards are not appliedconsistentlyStudy Session 7, Reading 24
  32. 32. • The conceptual framework is helpful in:–Assisting standard setters–Guiding preparers–Helping auditors–Assisting analystsStudy Session 7, Reading 24
  33. 33. • Relevance• Materiality• Faithful RepresentationAssumptions in Preparing Financial Statements• Accrual Accounting• Going ConcernStudy Session 7, Reading 24
  34. 34. • Assets• Liabilities• Equity• Revenue• ExpensesStudy Session 7, Reading 24
  35. 35. • Statement of Financial Position• Single Statement of Comprehensive Income or two statements• Statement of Changes in Equity• Statement of Cash FlowsStudy Session 7, Reading 22
  36. 36. • Assets and liabilities should be classified as either current andnon-current.• There should be specific disclosures in the notes about theinformation provided in the financial statements.Study Session 7, Reading 24
  37. 37. • Companies use either IFRS or US GAAP standard whenpreparing financial reports.• Though these two systems of standards are converging, therestill remains difference regarding the framework and generalreporting requirements.Study Session 7, Reading 24
  38. 38. • There should be full disclosure• Should be comprehensive• should have consistencyStudy Session 7, Reading 24
  39. 39. • Various bases for measuring the value of assets and liabilities.• Establishing financial reporting standards based on differentapproaches.• Difficulty in establishing financial reporting standards .Study Session 7, Reading 24
  40. 40. • Though there has been advancement towards globalconvergence of financial reporting system, there are significantdifferences in financial reporting system in global capitalmarkets.Study Session 7, Reading 24
  41. 41. • An analyst has to monitor the following three areas:–new products or transactions.–actions of standard setters and other groups representingusers of financial statements.–disclosure of accounting policies and estimates bycompanies.Study Session 7, Reading 24
  42. 42. • In the notes to the financial statements and accompanyingdiscussion, companies provide information about accountingpolicies and estimates.• The policies that management deems important are discussedin management commentary.Study Session 7, Reading 24
  43. 43. • Changes in accounting policies may be driven by changes insome accounting standards or by the company voluntarilychanging the policy.Study Session 7, Reading 24

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