FINANCIAL STATEMENT

ANALYSIS: AN INTRODUCTION
MODULE 1.1

FINMAN 21
 at the end of the session, a successful student
will be able to:
• Describe the roles of financial reporting and
financial statement analysis.
LEARNING
OUTCOMES • Describe the roles of the statement of financial
position, statement of comprehensive income,
statement of changes in equity, and statement
of cash flows in evaluating a company’s
performance and financial position.
 Financial reporting refers to the way
companies show their financial
FINANCIAL
REPORTING performance to investors, creditors, and
other interested parties by preparing and
presenting financial statements.
FINANCIAL REPORTING

According to the IASB Conceptual Framework for

Financial Reporting 2010:
“The objective of general-purpose financial reporting is
to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders,
and other creditors in making decisions about providing
resources to the entity. Those decisions involve buying,
selling or holding equity and debt instruments, and
providing or settling loans and other forms of credit.”
THE ROLE OF FINANCIAL STATEMENT ANALYSIS

The role of financial statement analysis is to use the information in a

company’s financial statements, along with other relevant information, to
make economic decisions.

Analysts use financial statement data to evaluate a company’s past

performance and current financial position in order to form opinions about the
company’s ability to earn profits and generate cash flow in the future.
DIFFERENT TYPES OF FINANCIAL STATEMENT

BALANCE SHEET INCOME STATEMENT OF STATEMENT OF

STATEMENT CHANGES IN CASH FLOWS
EQUITY
 BALANCE SHEET

The balance sheet (also known as the statement of financial

position or statement of financial condition) reports the firm’s
financial position at a point in time. The balance sheet consists
of three elements:
1. Assets are the resources controlled by the firm.
2. Liabilities are amounts owed to lenders and other creditors.
3. Owners’ equity is the residual interest in the net assets of
an entity that remains after deducting its liabilities.
 Transactions are measured so that the fundamental
BALANCE accounting equation holds:
SHEET
assets = liabilities + owners’ equity
 The income statement (also known as the statement of operations
or the profit and loss statement) reports on the financial
performance of the firm over a period of time. The elements of the
income statement include revenues, expenses, and gains and losses.
• Revenues are inflows from delivering or producing goods,
rendering services, or other activities that constitute the entity’s
INCOME ongoing major or central operations.
STATEMENT • Expenses are outflows from delivering or producing goods or
services that constitute the entity’s ongoing major or central
operations.
• Other income includes gains that may or may not arise in the
ordinary course of business.
 The statement of changes in equity
STATEMENT OF reports the amounts and sources of
CHANGES IN changes in equity investors’
EQUITY investment in the firm over a period
of time.
STATEMENT OF CASH FLOWS

The statement of cash flows reports the company’s cash receipts and
payments. These cash flows are classified as follows:
• Operating cash flows include the cash effects of transactions that
involve the normal business of the firm.
• Investing cash flows are those resulting from the acquisition or sale of
property, plant, and equipment; of a subsidiary or segment; of
securities; and of investments in other firms.
• Financing cash flows are those resulting from issuance or retirement
of the firm’s debt and equity securities and include dividends paid to
stockholders.
FINANCIAL STATEMENT NOTES

Financial statement notes ( footnotes)

include disclosures that provide further
details about the information summarized in
the financial statements. Footnotes allow
users to improve their assessments of the
amount, timing, and uncertainty of the
estimates reported in the financial statements.
FINANCIAL STATEMENT NOTES

Footnotes:
• Discuss the basis of presentation such as the fiscal period
covered by the statements and the inclusion of consolidated
entities.
• Provide information about accounting methods, assumptions,
and estimates used by management.
• Provide additional information on items such as business
acquisitions or disposals, legal actions, employee benefit plans,
contingencies and commitments, significant customers, sales to
related parties, and segments of the firm.
OBJECTIVE OF AUDITS OF FINANCIAL
STATEMENTS

An audit is an independent review of an entity’s financial statements.

Public accountants conduct audits and examine the financial reports and
supporting records. The objective of an audit is to enable the auditor to
provide an opinion on the fairness and reliability of the financial
statements.

The auditor examines the company’s accounting and internal control

systems, confirms assets and liabilities, and generally tries to determine that
there are no material errors in the financial statements. The auditor’s report
is an important source of information.
INTERNAL CONTROLS

Internal controls are the processes by which the company

ensures that it presents accurate financial statements. Internal
controls are the responsibility of management.
 The financial statement analysis framework consists of six
steps:

Step 1: State the objective and context.

Step 2: Gather data.

FINANCIAL
ANALYSIS Step 3: Process the data.
FRAMEWORK
Step 4: Analyze and interpret the data.

Step 5: Report the conclusions or recommendations.

Step 6: Update the analysis.

CONCLUSION

Financial statement analysis is a crucial aspect of any business as

it provides valuable insights into the financial health of a company.
By analyzing financial statements, businesses can make informed
decisions about investments, profitability, and sustainability.
 THANK YOU!

Nothing is Impossible.
The word itself says
“I’m Possible!”
– Audrey Hepburn