Module 18 Study Note Flashcard
Question:
How does financial statement analysis fit within a wider context of business analysis?
Answer:
It provides insights into a company's operational efficiency, profitability, and financial stability.
Question:
What is the primary purpose of financial statement analysis?
Answer:
To assess the financial health and performance of a company for informed decision-making.
Question:
What are the prerequisites for drawing up financial statements?
Answer:
Adherence to accounting principles, proper bookkeeping, and accurate financial data.
Question:
What are the main components of financial statements?
Answer:
Balance Sheet, Income Statement, Cash Flow Statement, and Statement of Changes in Equity.
Question:
Explain the relationship between share price and company profits.
Answer:
Share prices often reflect the market's expectations of a company's future profitability and earnings.
Question:
Define the financial reporting framework.
Answer:
A set of rules and guidelines that govern the preparation and presentation of financial statements.
Question:
Name key items found in the balance sheet.
Answer:
Assets, liabilities, and shareholders' equity.
Question:
What does the balance sheet/statement of financial position represent?
Answer:
A snapshot of a company's financial position at a specific point in time, showing assets, liabilities, and equity.
Question:
List other important information included in the annual report besides financial statements.
Answer:
Management discussion and analysis, corporate governance report, and notes to the financial statements.
Question:
What is the role of the auditor's report?
Answer:
To provide an independent opinion on the accuracy and fairness of a company's financial statements.
Question:
Briefly describe consolidated financial statements.
Answer:
Financial statements that present the financial position and results of a parent company and its subsidiaries as a single entity.
Question:
What is the function of the cash flow statement?
Answer:
To provide information on a company's cash inflows and outflows over a period.
Question:
Explain the statement of changes in equity.
Answer:
It details the changes in a company's equity over a reporting period, including profits, losses, and dividends.
Question:
What is the purpose of the income statement/statement of comprehensive income?
Answer:
To show a company's revenues, expenses, and profits over a specific period.
Question:
What are the limitations of ratio analysis?
Answer:
Ratios can be affected by accounting policies, do not account for market conditions, and may not be comparable across different industries.
Question:
Provide an example of ratio analysis.
Answer:
Calculating the current ratio to assess liquidity: Current Assets / Current Liabilities.
Question:
What are some common techniques of financial statement analysis?
Answer:
Ratio analysis, trend analysis, and vertical and horizontal analysis.
Question:
How can financial statement analysis be used to assess performance?
Answer:
By comparing financial ratios and metrics over time and against industry benchmarks.
Question:
Why is understanding the auditor's report crucial for investors?
Answer:
It helps investors assess the reliability and accuracy of the financial statements.
Question:
What are some common accounting issues in financial statement analysis?
Answer:
Revenue recognition, expense matching, and inventory valuation.
Question:
List some advantages of ratio analysis.
Answer:
Easy to compute, helps in comparing performance over time, and can highlight financial strengths and weaknesses.
Question:
What does vertical analysis of financial statements involve?
Answer:
Comparing each line item as a percentage of a base figure within the same financial statement.
Question:
Define horizontal analysis in the context of financial statement analysis.
Answer:
Analyzing trends over time by comparing financial data across multiple periods.
Question:
What is the significance of the debt-to-equity ratio?
Answer:
It indicates the relative proportion of shareholders' equity and debt used to finance a company's assets.
Question:
Explain the importance of the current ratio in liquidity analysis.
Answer:
It measures a company's ability to pay off its short-term liabilities with its short-term assets.
Question:
What does the term 'liquidity' refer to in financial analysis?
Answer:
A company's ability to meet its short-term obligations.
Question:
Explain the term 'earnings per share (EPS)'.
Answer:
A measure of a company's profitability calculated as net income divided by the number of outstanding shares.
Question:
Why is the cash flow statement important for investors?
Answer:
It provides insights into the liquidity and financial flexibility of a company.
Question:
What is the purpose of the statement of comprehensive income?
Answer:
To show all income and expenses, including those not realized through normal business operations, such as gains and losses from investments.
Question:
How does the price-to-earnings (P/E) ratio help investors?
Answer:
It helps investors determine the market value of a stock compared to the company's earnings.
