Main Financial Statements And Steps In Performing Accouting Analysis

807 words - 4 pages

Main financial statements

Income statement
Provides a summary of the revenues (increases in economic benefits) and expenses (decreases in economic benefits) over a period of time Provides information about the firm’s performance, showing whether the firm was profitable over the period

EXAMPLE Inc. – Income Statement / April 30, 2013

Net income = Revenues – Expenses

Balance sheet or Statement of financial position
Provides information about the economic resources controlled by the firm (Assets) which is useful to estimate firm’s ability to generate future cash flows Provides information about the firm’s financial structure (Liabilities and Equity) which is useful to:
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e. changes in net assets) changes in financial position changes in shareholders’ funds Elements of the financial statement Assets, Liabilities and Equity, Income and Expenses, Receipts and Payments, Statement of changes in equity, Contributions from (distributions to) equity holders.

Exercise 1
Using Sonae Sierra consolidated financial statements for the yearend 2013, identify the financial statement(s) which provide the amount of:
◦ ◦ ◦ ◦ Assets; Net income; Retained earnings; Cash and cash equivalents.

Exercise 2
Assume that bank XPTO is interested in finding answers to the following questions about a company applying for a loan. In each case, indicate which of the four financial statements the bank should examine first to answer the question. If appropriate, also indicate which other financial statement(s) would provide further support for the answer.

Steps in performing accounting analysis

Accounting analysis
The purpose of accounting analysis is to evaluate the degree to which accounting captures its underlying business reality;

FS are inherently limited
backward looking, not focusing on the future prospects o Conservative accounting • some events are unrecorded (eg .human resources and the effects of inflation) • some events are not capitalized (eg. research expenditures, brand building expenses) o FS include forecast errors • due to complexity of business transactions and lack of predictability of firm’s environment and economy.

Book Value
+
Add adjustments for: (1) noise from accounting rules (2) forecast errors (3) management bias
= True Value
(value that reflects the business reality)

FS include management bias
•Managers often choose accounting methods and estimates that make them look good.

Accounting analysis
Steps in performing accounting analysis

Step 1:...

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