FINMAN 2 – Financial Statements Analysis

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Questions and Answers

Match the financial statements with their descriptions:

Balance Sheet = Shows the financial position at a specific point in time Income Statement = Reports revenues and expenses over a period Statement of Cash Flows = Displays cash inflows and outflows Statement of Shareholders’ Equity = Reports changes in equity components

Match the types of financial statement analysis with their focus:

Cross-sectional analysis = Comparison with industry peers Time-series analysis = Evaluation of performance over time Trend analysis = Identifying patterns in financial data Ratio analysis = Evaluating relationships between financial statement items

Match the limitations of financial statement analysis with their descriptions:

Variation in accounting principles = Inconsistency in data interpretation Condensed presentation = Lack of detailed information Reflecting change in purchasing power = Not accounting for inflation effects Performance indicators = Not absolute measures of success

Match the objective of financial statements with their users:

Provide useful information = For investors and creditors Identify financial strengths = For internal management Assess financial weaknesses = For regulators Evaluate future performance = For industry analysts Signup and view all the answers

Match the components of basic financial statements:

Balance Sheet = Statement of Financial Position Income Statement = Statement of Comprehensive Income Notes to Financial Statements = Supplemental information Statement of Cash Flows = Cash transactions summary Signup and view all the answers

Match the characteristics of financial information with their importance:

Relevance = Helps in decision making Reliability = Ensures data accuracy Comparability = Allows industry benchmarking Understandability = Aids user comprehension Signup and view all the answers

Match the types of users of financial statements with their interests:

Investors = Seeking returns on investment Lenders = Assessing credit risk Management = Strategizing operational efficiency Regulators = Ensuring compliance with laws Signup and view all the answers

Match the financial statement components with their implications:

Assets = Economic resources owned Liabilities = Obligations owed Equity = Owner's claim after liabilities Revenue = Income generated from operations Signup and view all the answers

Match the performance analysis techniques with their definitions:

Horizontal Analysis = Percentage analysis of changes in comparative financial statements Vertical Analysis = Percentage analysis used to show the relationship of each component to the base total within a single statement Common Size Financial Statements = Statements showing amounts translated from monetary values to percentages Financial Ratios = Comparative measures derived from financial statements to assess performance Signup and view all the answers

Match the components of a financial analysis with their functions:

Establish objectives = Define the purpose of the financial analysis Study the industry = Assess external conditions affecting the firm Evaluate financial statements = Analyze data to uncover trends and performance metrics Summarize findings = Consolidate and interpret results of the analysis Signup and view all the answers

Match the items with their correct conversion procedures:

Balance Sheet = Each item divided by total assets Income Statement = Each item restated as a percentage of net sales Common Size Balance Sheet = Assets, liabilities, and equity as a percentage of total assets Common Size Income Statement = Revenue and expenses expressed as a percentage of sales Signup and view all the answers

Match the financial analysis steps with their correct descriptions:

Compute changes = Calculate the peso amount of change from the base period Divide for percentage = Divide the change by the base-period amount Management influence = Awareness of potential management manipulation of financial outcomes Industry climate = Understanding economic development in relation to firm operations Signup and view all the answers

Match the analysis techniques with their usage:

Horizontal Analysis = Analyzing trends over time Vertical Analysis = Understanding the proportion of each item within a single statement Financial Ratios = Comparing different financial metrics Common Size Statements = Consolidating financial data into percentages for easier comparison Signup and view all the answers

Match the types of financial statement analysis with their characteristics:

Horizontal Analysis = Focuses on comparisons over multiple periods Vertical Analysis = Analyzes each item in relation to a total within a single period Financial Ratios = Utilizes mathematical relationships of line items Common Size Statements = Helps in comparing financials of companies of different sizes Signup and view all the answers

Match the phases of analyzing financial statements with their activities:

Establish objectives = Set goals for the financial analysis process Study the industry = Evaluate external factors influencing the firm Develop knowledge of the firm = Gain insights into internal operations and management quality Summarize findings = Present interpretations based on analysis outcomes Signup and view all the answers

Match the analysis concepts with their main focus:

Horizontal Analysis = Change over time Vertical Analysis = Proportional relationships within a single statement Financial Ratios = Quantitative comparisons for performance evaluation Common Size Statements = Relative sizes of components expressed as percentages Signup and view all the answers

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Study Notes

Financial Statements Overview

Financial statements are structured representations detailing an enterprise's financial position and transactions.
They provide insights on economic resources, claims against the entity, and changes due to transactions and events.
Aim to offer useful financial information to investors, lenders, and creditors for decision-making.

Basic Financial Statements

Balance Sheet (Statement of Financial Position): Reflects assets, liabilities, and equity.
Income Statement (Statement of Comprehensive Income): Details revenues and expenses over a period.
Statement of Shareholders’ Equity: Shows changes in equity from transactions with shareholders.
Statement of Cash Flows: Reports cash inflows and outflows during a period.
Notes to the Financial Statement: Provide additional context and disclosures vital for interpreting the financial statements.

Financial Statement Analysis

Involves extracting and evaluating information from financial statements to gauge a company’s performance and financial health.
Key aspects include:
- Cross-sectional analysis: Comparing performance with industry peers.
- Time-series analysis: Evaluating trends over time.
Objective is to identify financial strengths and weaknesses of an organization.

Limitations of Financial Statement Analysis

Analysis results are not absolute indicators of performance.
Limitations stem from:
- Variability and inconsistency in accounting principles.
- Condensed data presentation.
- Failure to account for changes in purchasing power.
Performance metrics should be interpreted concerning the business context and historical performance.
Analysts must remain cautious of potential management manipulation of financial data to mislead stakeholders.

Steps in Analyzing Financial Statements

Establish the analysis objectives.
Study the industry context and connect it to economic developments.
Gain insights into the firm and evaluate management quality.
Analyze financial statements using techniques such as:
- Horizontal Analysis/Index Analysis
- Vertical Analysis
- Financial Ratios
Summarize findings and reach conclusions regarding the firm based on analysis.

Horizontal Analysis

Conducted as a percentage analysis of changes in financial statements over periods.
Steps include:
- Determine the peso amount of change from the prior period to the current.
- Calculate the percentage change by dividing the amount of change by the base-period figure, with exceptions for negative or zero base figures.

Vertical Analysis

A percentage analysis to show each component's relationship to the base total within a single statement.
Common Size Financial Statements transform amounts into percentages to indicate relative sizes.
Common size balance sheets express assets, liabilities, and equity as a percentage of total assets.
Common size income statements detail revenues and expenses as percentages of sales.

Conversion Procedures

For balance sheets, divide each item by total assets to derive percentages.
For income statements, convert each item into a percentage of net sales by dividing each item by net sales.