CMA (USA)

(CERTIFIED MANAGEMENT ACCOUNTING)

PART 1: EXTERNAL FINANCIAL REPORTING ANALYSIS

Chp 1: FINANCIAL STATEMENTS

INTRODUCTION:
Financial accounting is a process of reporting the results and effects of the financial
transactions a business undertakes.

 The objectives of financial reporting is:

 To provide useful financial information about the entity for decision making.
(The decisions relate to buying, selling, or holding debt or equity intruments and
providing credit.)

Financial accounting is different from Management accounting.

Management accounting assists management decision making, planning and control.
Management accounting information is therefore primarily directed to specific
internal users.

USERS OF FINANCIAL STATEMENTS:

Users may directly or indirectly have an economic interest in specific business.

Direct Users: They usually invest or manage the business and are directly affected by
the results of a company.
Direct users stand to loose money if company has financial problems.
Users with direct interest includes: INVESTORS, SUPPLIERS OR CREDITORS,
EMPLOYEES.

Indirect Users: They usually advise, influence or represent users with direct interest.
Users having indirect interest includes: FINANCIAL ADVISORS AND
ANALYSTS, STOCK MARKETS OR EXCHANGES, REGULATORY
AUTHORITIES.

Internal Users: They make decisions within the firm.

These users includes MANAGEMENT, EMPLOYEES AND BOARD OF
DIRECTORS.

External Users: They make decision from outside of the firm about wether or not to
begin a relationship, continue a relationship, or change their relationship with the
firm.
These users include:INVESTORS, CREDITORS, FINANCIAL ADVISORS AND
ANALYSTS, STOCK EXCHANGES AND REGULATORY AGENCIES.
Features of Financial Statements

 A full set of financial statement includes the following:

1. INCOME STATEMENT.
2. STATEMENT OF COMPREHENSIVE INCOME.
3. STATEMENT OF CHANGES IN EQUITY.
4. STATEMENT OF FINANCIAL POSITION.
5. STATEMENT OF CASH FLOW.
 Information presented in financial statement must be relevant and faithfully
represented in order to be USEFUL.
 The information should be COMPARABLE with similar information for other
entity and the same entity for another period or date. Comparability allows users
to understand similarities and differencies.
 Financial statements are prepared under the GOING CONCERN
ASSUMPTION of accounting. Which means the entity assumes to continue
operating indefinitely.
 Financial statement is prepared under the ACCRUAL BASIS of accounting.
Therefore, revenues are recognised in the period in which they were earned even
if the cash will be recieved in the future period and the expense are recognised in
the period in which they incur even if will be paid in future.

Income Statement
Income statement commonly called a profit and loss account (P&L) statement,
measures the earning of an entity’s operations over a period of time.
Elements of income statements are:
1. Revenue- It represents inflows or other enhancements to the assets and settlement
of liabilities (or a combinations of both) as a result of dilevering or producing goods,
rendering services, or other activities that constitutes the entity’s ongoing major or
central operations.
2. Gains- Gains increases in equity as a result of transactions that are not part of the
company’s main or central operations or do not result from revenues or investments
by the owner of the entity.
3. Expenses are outflows or other using-ups of assets or the incurrence of liabilities as
a result of dilevering goods or providing services that are the entitys main or central
operations.
4. Losses decreases in equity as a result of transactions that are not part of the
company main or central operations and that do not result from expenses or
distribution made to the owners of the company.

Revenue, expenses, gains and losses are recorded in tempory (Nominal) Accounts
because they record transactions, events and other circumstances during a period of
time.
These accounts are closed at the end of each accounting period, and their balances are
transffered to real accounts.
Single-Step Income Statement:
A single step income statement subracts total Expenses and Losses from Total
Revenues and Gains in a single step.
No attempts is made to categorize expenses and revenues or to arrive interim
substotals.
ALL INCOME - ALL EXPENSES = NET INCOME.
However, despite the inherent simplicity of the single step income statement, the
multiple-step income statement is more popular because it provides more information
to explain a firms financial performance.

Multi - Step Income Statement

The Multi step income statement separates information into operating and non
operating categories.
The sections in the statement that do not relate to operations are called other revenues
and gains and other expenses and losses.
These categories can include gains and losses from the sale of Equipments, interest,
revenue and expenses or dividend recieved.
The multi step income statement has sub categories, such as COGS, OPERATING
EXPENSES, and other revenues, expenses, gains and losses.
These sub categories allow users to compare a company’s result over time or to
evaluate its financial performance relative to its competitors.
Such comparisons becomes more useful as more years of income statements are
compared.
The multiple-step income statement often reports subtotal for gross profit and income
from operations, which are useful for financial statement analysis proposes
Eg: Gross profit can can be used to compare how comppetitive pressure have affected
profit margins.