Financial Statement Analysis K R Subramanyam John J Wild

Financial Reporting and Analysis 2 CHAPTER

Statutory Financial Reports Annual reports Quarterly reports Balance sheet (Statement of financial position) Income statement Statement of Cash flows Statement of shareholders’ equity Notes to financial statements

ASSETS = LIABILITIES + OWNERS’ EQUITY BALANCE SHEET ASSETS = LIABILITIES + OWNERS’ EQUITY To report an entity’s assets, liabilities and owners’ equity at a point in time.

INCOME STATEMENT To report the success/failure in doing business for a period of time. To summarize revenues and expenses incurred in a period: monthly, quarterly, yearly.

STATEMENT OF CASH FLOWS To provide information about cash-in and cash-out in a period. To report cash flows for 3 business activities: Operating activities Investing activities Financing activities

RELATIONSHIPS BETWEEN FINANCIAL STATEMENTS BALANCE SHEET Assets Current assets PPE Liabilities & Equity Liabilities A/P & Accruals Debt & loans Equity   STATEMENT OF CASH FLOWS Cash flows from operating activities Cash flows from investing activities    Cash flows from financing activities INCOME STATEMENT Revenue Expenses Net Income 

NOTES TO FINANCIAL STATEMENTS To help users understand more clearly about figures on financial statements. 1 Accounting policies 2 Additional information for items on financial statements 3 Equity changes 4 Other informaiton

AUDIT REPORT

ENVIRONMENTAL FACTORS Accounting standards Accounting informaiton system within an entity Financial statements

GAAP Principles Accounting entity concept Going-concern assumption Periodic assumption Matching Disclosure Materiality Conservatism Principles Historical cost Revenue recognition Objectivity TNG T3

Desirable Qualities of Accounting Information Relevance Reliability Timeliness Comparability Substance over form Materiality

Limitation of Accounting Infomation Timeliness - periodic disclosure, not real-time basis Frequency - quarterly and annually Forward Looking - limited prospective information

Economic Income vs. Accounting Income Measures changes in Shareholders wealth. Cash flows + Present value of expected future cash flows. Based on the concept of accrual accounting Revenue recognition Expense matching

Demand for Accounting Analysis Adjust for accounting distortions so financial reports better reflect economic reality Adjust general-purpose financial statements to meet specific analysis objectives of a particular user

Financial statements in global environment Comparability between countries IAS & IFRS born and revised Each particular country’s accounting standards have a lot in common with normal international accounting practices Vingroup