International Financial Statement Analysis Workbook

Thomas R. Robinson, Hennie van Greuning, CFA, Elaine Henry, Michael A. Broihahn

• Publisher: Wiley
• Year: 2008
• Print ISBN: 9780470287675
• eBook ISBN: 9780470460153
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

To enhance your understanding of the tools and techniques presented in International Financial Statement Analysis, pick up the International Financial Statement Analysis Workbook. This companion study guide contains carefully constructed problems with detailed solutions as well as concise learning outcome statements and summary chapter overviews. With this Workbook, you can test your understanding of the many issues associated with this discipline, before putting them to use in real-world situations. If you intend on acquiring a practical mastery of international financial statement analysis, this informative guide can help you succeed.

PART I

LEARNING OUTCOMES, SUMMARY OVERVIEW, AND PROBLEMS

CHAPTER 1

FINANCIAL STATEMENT ANALYSIS: AN INTRODUCTION

Thomas R. Robinson, CFA
CFA Institute
Charlottesville, Virginia

Hennie van Greuning, CFA
World Bank
Washington, DC

Elaine Henry, CFA
University of Miami
Miami, Florida

Michael A. Broihahn, CFA
Barry University
Miami, Florida

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Discuss the roles of financial reporting and financial statement analysis.

• Discuss the roles of the key financial statements (income statement, balance sheet, cash flow statement, and statement of changes in owners’ equity) in evaluating a company’s performance and financial position.

• Discuss the importance of financial statement notes and supplementary information (including disclosures of accounting methods, estimates, and assumptions) and management’s discussion and analysis.

• Discuss the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.

• Identify and explain information sources besides annual financial statements and supplementary information that analysts use in financial statement analysis.

• Describe the steps in the financial statement analysis framework.

SUMMARY OVERVIEW

This chapter has presented an overview of financial statement analysis. Among the major points covered are the following:

• The primary purpose of financial reports is to provide information and data about a company’s financial position and performance, including profitability and cash flows. The information presented in financial reports — including the financial statements, financial notes, and management’s discussion and analysis — allows the financial analyst to assess a company’s financial position and performance and trends in that performance.

• Key financial statements that are a primary focus of analysis include the income statement, balance sheet, cash flow statement, and statement of owners’ equity.

• The income statement presents information on the financial results of a company’s business activities over a period of time. The income statement communicates how much revenue the company generated during a period and what costs it incurred in connection with generating that revenue. The basic equation underlying the income statement is Revenue — Expense = Net income.

• The balance sheet discloses what a company owns (assets) and what it owes (liabilities) at a specific point in time. Owners’ equity represents the portion belonging to the owners or shareholders of the business; it is the residual interest in the assets of an entity after deducting its liabilities. The three parts of the balance sheet are formulated in the accounting relationship of Assets = Liabilities + Owners’ equity.

• Although the income statement and balance sheet provide a measure of a company’s success, cash and cash flow are also vital to a company’s long-term success. Disclosing the sources and uses of cash in the cash flow statement helps creditors, investors, and other statement users evaluate the company’s liquidity, solvency, and financial flexibility.

• The statement of changes in owners’ equity reflects information about the increases or decreases to a company’s owners’ equity.

• In addition to the financial statements, a company provides other sources of financial information that are useful to the financial analyst. As part of his or her analysis, the financial analyst should read and assess the information presented in the company’s financial note disclosures and supplementary schedules as well as the information contained in the MD&A. Analysts must also evaluate footnote disclosures regarding the use of alternative accounting methods, estimates, and assumptions.

• A publicly traded company must have an independent audit performed on its year-end financial statements. The auditor’s opinion provides some assurance about whether the financial statements fairly reflect a company’s performance and financial position. In addition, for U.S. publicly traded companies, management must demonstrate that the company’s internal controls are effective.

• The financial statement analysis framework provides steps that can be followed in any financial statement analysis project, including the following:

• Articulate the purpose and context of the analysis.

• Collect input data.

• Process data.

• Analyze/interpret the processed data.

• Develop and communicate conclusions and recommendations.

• Follow up.

PROBLEMS

1. Providing information about the performance and financial position of companies so that users can make economic decisions best describes the role of

a. auditing.

b. financial reporting.

c. financial statement analysis.

2. A company’s current financial position would best be evaluated using the

a. balance sheet.

b. income statement.

c. cash flow statement.

3. A company’s profitability for a period would best be evaluated using the

a. balance sheet.

b. income statement.

c. cash flow statement.

4. Accounting methods, estimates, and assumptions used in preparing financial statements are found

a. in footnotes.

b. in the auditor’s report.

c. in the proxy statement.

5. Information about management and director compensation would best be found

a. in footnotes.

b. in the auditor’s report.

c. in the proxy statement.

6. Information about material events and uncertainties would best be found in

a. footnotes.

b. the proxy statement.

c. management’s discussion and analysis.

7. What type of audit opinion is preferred when analyzing financial statements?

a. Qualified.

b. Adverse.

c. Unqualified.

8. Ratios are an input into which step in the financial analysis framework?

a. Process data.

b. Collect input data.

c. Analyze/interpret the processed data.

CHAPTER 2

FINANCIAL REPORTING MECHANICS

Thomas R. Robinson, CFA
CFA Institute
Charlottesville, Virginia

Hennie van Greuning, CFA
World Bank
Washington, DC

Elaine Henry, CFA
University of Miami
Miami, Florida

Michael A. Broihahn, CFA
Barry University
Miami, Florida

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Identify the groups (operating, investing, and financing activities) into which business activities are categorized for financial reporting purposes and classify any business activity in the appropriate group.

• Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements.

• Explain the accounting equation in its basic and expanded forms.

• Explain the process of recording business transactions using an accounting system based on the accounting equations.

• Explain the need for accruals and other adjustments in preparing financial statements.

• Prepare financial statements given account balances and/or other elements in the relevant accounting equation, and explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity.

• Describe the flow of information in an accounting system.

• Explain the use of the results of the accounting process in security analysis.

SUMMARY OVERVIEW

The accounting process is a key component of financial reporting. The mechanics of this process convert business transactions into records necessary to create periodic reports on a company. An understanding of these mechanics is useful in evaluating financial statements for credit and equity analysis purposes and in forecasting future financial statements. Key concepts are as follows:

• Business activities can be classified into three groups: operating activities, investing activities, and financing activities.

• Companies classify transactions into common accounts that are components of the five financial statement elements: assets, liabilities, equity, revenue, and expense.

• The core of the accounting process is the basic accounting equation: Assets = Liabilities + Owners’ equity.

• The expanded accounting equation is Assets = Liabilities + Contributed capital + Beginning retained earnings + Revenue — Expenses — Dividends.

• Business transactions are recorded in an accounting ...

Table of contents

• Title Page
• Copyright Page
• PART I - LEARNING OUTCOMES, SUMMARY OVERVIEW, AND PROBLEMS
• PART II - SOLUTIONS