Concepts Description
Introduction
Role of financial reporting Provide to variety of users useful information about the Company's performance and financial position
Role of FS analysis Use FS data to support economic decisions
BS Assets, Liabilities, OE at a point in time
PL Results from business activities
Revenue, Cost from generating revenue, Profit/loss
Statement of Change in Equity Amount and source of changes in OE
CF Amount, source and use of cash
Footnotes and supplementary Include:
schedule ‐ Information about the accounting method, estimates and assumptions;
‐ segments reults, commitments and contingencies, legal proceedings, acquisition and divestitures, issuance of stock options and details of employees
benefit plans
Management's commentary Contains:
(discussion and analysis) ‐ Overview of the Company;
‐ Business trends, future capital needs, liquidity, significant events, significant choices of accounting method requiring management judgement.
Objective of audits Provide opinion on the FS.
Ensure no material errors
Review the Company Internal Control
Audit opinion ‐ Unqualified (clean)
‐ Qualified
‐ Adverse opinion (presented not fairly or materially nonconforming with Accounting Standards)
‐ Disclaimer of opinion (Unable to express opinion)
Management responsibility ‐ Mantaining effective internal control
‐ Ensure accuracy of its FS
Other important information ‐ Quarterly/semiannually FS
sources ‐ Proxy statements
‐ Press releases
‐ Earning guidance
‐ Industry information
‐ Comparable companies
Financial analysis framework 1. State the objective of the analysis (which question, which form, how much resource and how much time available)
2. Gather data (collect FS, other relevant data; interview management, suppliers, customers; site visit)
3. Process data (make appropriate adjustments; calculate ratios)
4. Analyze and interpret data (use data to answer questions in the first step)
5. Report the conclusions and recommendation (prepare report comply with Code and Standards)
6. Update the analysis (Repeat these steps periodically; change conclusion and recommendation when neccessary)
Financial Reporting Mechanics
Classification of business activities ‐ Operating activities: Ordinary business;
‐ Investing activities: buying/disposing of long‐term assets;
‐ Financing activities: Issue/Repay debt, issue/repurchase stock, pay cash interest/dividend.
Assets Firm's economic resourses
Liabilities Creditor's claim on firm's resources
OE Capital, retained earnings, cumulative OCE
Revenue Sales, investment income, gains
Expenses COGS, Selling & GA expenses, depreciation, interest, tax, losses
Accrual basis Revenue and expenses must be recorded when earned or incurred, not at the time of cash payments.
Link between BS, PL, CF and Changes in BS balance over a period are reflected in PL, CF, and change in OE
change in OE
,General journal journal entries sorted by date
General ledger journal entries sorted by account
Reason for understanding how to FR requires choice of method, judgement and estimate
produce FS
Financial Reporting Standards
Reporting standard ‐ Ensure different firms' FS are comparable
‐ narrow the range of reasonable estimates
support users who rely on Fs for the Company's activities, profitability and creditworthiness
Standard‐setting bodies Private organisation that establish reporting standards
E.g: IASB and FASB (US)
Regulatory authorities Government agencies that enforces compliance with FR standards
E.g: SEC (Securities and exchange commission ‐ US); Financial Services Authority (FSA); and International Organisation of Securities Commissions (IOSCO)
Barrier for convergence to IFRS ‐ different opinion among standard‐setting bodies and regulatory authorities
‐ political pressure from entities affected by changes
Features of FS ‐ Fair representation
‐ Going concern
‐ Accrua accounting
‐ Consistency (between period on presentation and classification)
‐ Materiality (free of misstatements or ommission that could influence users' decisions)
‐ Aggregation (combine similar items, and separate dissimilar items)
‐ No offsetting (between assets and liabilities, unless standards permit or require it)
‐ Reporting frequency (at least annually)
‐ Comparative information
Reaining differences between US IASB: lists income and expenses as elements related to performance
GAAP and IFRS FASB: includes revenue, expenses, gains, losses and comprehensive income.
IASB: Assets are resource from which a future economic benefit is expected to flow
FASB: future economic benefit
IASB: upward valuation of assets is permitted
FASB: upward valuation of most assets is not permitted
Coherent FR framework ‐ Transparency (full disclosure, fair presentation)
‐ Comprehensive (all types of transactions with financial implications should be part of the framework, even new types of transaction)
‐ Consistent (Similar transactions are accounted similarly)
Barrier of coherent FR framework ‐ Valuation (fair value vs historical cost)
‐ Standarad setting (Principles‐bases vs Rules‐based vs Objective‐oriented)
‐ Measurement (trade off between measurement elements at a point in time vs change between points in time)
Awareness for analyst ‐ Evolving FR standards
‐ New products/innovations → new types of transaction
Disclosure requirements ‐ accounting policies and estimates (which requires estimates, which has changed since prior period)
‐ Impact from adopting new standards
, Concepts Description
Income statement
Income statement Report revenue and expenses over a period of time
Revenue ‐ expenses = net income
Income statement's purpose Investors: valuation purpose
Lenders: repayment ability
Revenue Sales of goods and services from normal business activities
Net revenue Revenue less estimated returns and allowances
Expenses Amount incurred to generate revenue (COS, OPEX, interest, tax)
Expenses might be grouped by nature or function
Gains/Losses Might or might not result from normal business activities, and increase or decrease the economic benefit
Net income Net income = revenue ‐ ordinary expenses + other income ‐ other expenses + gains ‐ losses
NCI Prorata share of the subsidiary's income not owned by the parent
Income statement presentation Single‐step: all revenue are grouped; all expenses are grouped
Gross profit:
Revenue ‐ COS = Gross profit
Gross profit ‐ OPEX (Selling and GA expenses) = Operating profit
Operating profit ‐ interest ‐ tax = Net profit
Revenue
Revenue recognition (sale of 1. Risk and reward of ownership is transferred
goods) ‐ IASB 2. No continuing control or management over the good solds
3. Revenue could be measured reliably
4. Probable flow of econoic benefits
5. Costs could be measured reliably
Revenue recognition (service 1. Revenue could be measured reliably
rendered) ‐ IASB 2. probable flow of economic benefits
3. stage of completion could be measured
4. cost incurred and cost of completion could be measured reliably
Revenue recognition (Sale of FASB:
goods and service rendered) ‐ 1. Revenue is recognised when (a) realised or realisable and (b) earned.
FASB
SEC:
2. There is evidence of an arrangement between buyer ans seller
3. Product has been delivered; or service has been rendered
3. Price is determinable
4. Seller is reasonable sure of collecting money
Long‐term contract 1. Percentage of completion
When outcome could be reliably measured: Revenue, cost and profit are recognised as the work is performed, based on the percentage of completion
(Total cost incurred to date divided by total expected cost)
When outcome could not be reliaby measured: Revenue is recognised to the limit of cost. Costs are recognised when incrred. Profit is recognised at only
at completion (IFRS only)
2. Completed contract method (US GAAP only ‐ when outcome coulf not be reliably measured): Revenue, expenses and profit are rcognised at
completion
** If loss is expected, loss must be recognised immediately**
Pros and Cons of percentage of Pros: Smoother earning; better matching of revenue and expenses
completion Cons: More aggressive since revene is recorded sooner; more subjective, since it requires estimates
Introduction
Role of financial reporting Provide to variety of users useful information about the Company's performance and financial position
Role of FS analysis Use FS data to support economic decisions
BS Assets, Liabilities, OE at a point in time
PL Results from business activities
Revenue, Cost from generating revenue, Profit/loss
Statement of Change in Equity Amount and source of changes in OE
CF Amount, source and use of cash
Footnotes and supplementary Include:
schedule ‐ Information about the accounting method, estimates and assumptions;
‐ segments reults, commitments and contingencies, legal proceedings, acquisition and divestitures, issuance of stock options and details of employees
benefit plans
Management's commentary Contains:
(discussion and analysis) ‐ Overview of the Company;
‐ Business trends, future capital needs, liquidity, significant events, significant choices of accounting method requiring management judgement.
Objective of audits Provide opinion on the FS.
Ensure no material errors
Review the Company Internal Control
Audit opinion ‐ Unqualified (clean)
‐ Qualified
‐ Adverse opinion (presented not fairly or materially nonconforming with Accounting Standards)
‐ Disclaimer of opinion (Unable to express opinion)
Management responsibility ‐ Mantaining effective internal control
‐ Ensure accuracy of its FS
Other important information ‐ Quarterly/semiannually FS
sources ‐ Proxy statements
‐ Press releases
‐ Earning guidance
‐ Industry information
‐ Comparable companies
Financial analysis framework 1. State the objective of the analysis (which question, which form, how much resource and how much time available)
2. Gather data (collect FS, other relevant data; interview management, suppliers, customers; site visit)
3. Process data (make appropriate adjustments; calculate ratios)
4. Analyze and interpret data (use data to answer questions in the first step)
5. Report the conclusions and recommendation (prepare report comply with Code and Standards)
6. Update the analysis (Repeat these steps periodically; change conclusion and recommendation when neccessary)
Financial Reporting Mechanics
Classification of business activities ‐ Operating activities: Ordinary business;
‐ Investing activities: buying/disposing of long‐term assets;
‐ Financing activities: Issue/Repay debt, issue/repurchase stock, pay cash interest/dividend.
Assets Firm's economic resourses
Liabilities Creditor's claim on firm's resources
OE Capital, retained earnings, cumulative OCE
Revenue Sales, investment income, gains
Expenses COGS, Selling & GA expenses, depreciation, interest, tax, losses
Accrual basis Revenue and expenses must be recorded when earned or incurred, not at the time of cash payments.
Link between BS, PL, CF and Changes in BS balance over a period are reflected in PL, CF, and change in OE
change in OE
,General journal journal entries sorted by date
General ledger journal entries sorted by account
Reason for understanding how to FR requires choice of method, judgement and estimate
produce FS
Financial Reporting Standards
Reporting standard ‐ Ensure different firms' FS are comparable
‐ narrow the range of reasonable estimates
support users who rely on Fs for the Company's activities, profitability and creditworthiness
Standard‐setting bodies Private organisation that establish reporting standards
E.g: IASB and FASB (US)
Regulatory authorities Government agencies that enforces compliance with FR standards
E.g: SEC (Securities and exchange commission ‐ US); Financial Services Authority (FSA); and International Organisation of Securities Commissions (IOSCO)
Barrier for convergence to IFRS ‐ different opinion among standard‐setting bodies and regulatory authorities
‐ political pressure from entities affected by changes
Features of FS ‐ Fair representation
‐ Going concern
‐ Accrua accounting
‐ Consistency (between period on presentation and classification)
‐ Materiality (free of misstatements or ommission that could influence users' decisions)
‐ Aggregation (combine similar items, and separate dissimilar items)
‐ No offsetting (between assets and liabilities, unless standards permit or require it)
‐ Reporting frequency (at least annually)
‐ Comparative information
Reaining differences between US IASB: lists income and expenses as elements related to performance
GAAP and IFRS FASB: includes revenue, expenses, gains, losses and comprehensive income.
IASB: Assets are resource from which a future economic benefit is expected to flow
FASB: future economic benefit
IASB: upward valuation of assets is permitted
FASB: upward valuation of most assets is not permitted
Coherent FR framework ‐ Transparency (full disclosure, fair presentation)
‐ Comprehensive (all types of transactions with financial implications should be part of the framework, even new types of transaction)
‐ Consistent (Similar transactions are accounted similarly)
Barrier of coherent FR framework ‐ Valuation (fair value vs historical cost)
‐ Standarad setting (Principles‐bases vs Rules‐based vs Objective‐oriented)
‐ Measurement (trade off between measurement elements at a point in time vs change between points in time)
Awareness for analyst ‐ Evolving FR standards
‐ New products/innovations → new types of transaction
Disclosure requirements ‐ accounting policies and estimates (which requires estimates, which has changed since prior period)
‐ Impact from adopting new standards
, Concepts Description
Income statement
Income statement Report revenue and expenses over a period of time
Revenue ‐ expenses = net income
Income statement's purpose Investors: valuation purpose
Lenders: repayment ability
Revenue Sales of goods and services from normal business activities
Net revenue Revenue less estimated returns and allowances
Expenses Amount incurred to generate revenue (COS, OPEX, interest, tax)
Expenses might be grouped by nature or function
Gains/Losses Might or might not result from normal business activities, and increase or decrease the economic benefit
Net income Net income = revenue ‐ ordinary expenses + other income ‐ other expenses + gains ‐ losses
NCI Prorata share of the subsidiary's income not owned by the parent
Income statement presentation Single‐step: all revenue are grouped; all expenses are grouped
Gross profit:
Revenue ‐ COS = Gross profit
Gross profit ‐ OPEX (Selling and GA expenses) = Operating profit
Operating profit ‐ interest ‐ tax = Net profit
Revenue
Revenue recognition (sale of 1. Risk and reward of ownership is transferred
goods) ‐ IASB 2. No continuing control or management over the good solds
3. Revenue could be measured reliably
4. Probable flow of econoic benefits
5. Costs could be measured reliably
Revenue recognition (service 1. Revenue could be measured reliably
rendered) ‐ IASB 2. probable flow of economic benefits
3. stage of completion could be measured
4. cost incurred and cost of completion could be measured reliably
Revenue recognition (Sale of FASB:
goods and service rendered) ‐ 1. Revenue is recognised when (a) realised or realisable and (b) earned.
FASB
SEC:
2. There is evidence of an arrangement between buyer ans seller
3. Product has been delivered; or service has been rendered
3. Price is determinable
4. Seller is reasonable sure of collecting money
Long‐term contract 1. Percentage of completion
When outcome could be reliably measured: Revenue, cost and profit are recognised as the work is performed, based on the percentage of completion
(Total cost incurred to date divided by total expected cost)
When outcome could not be reliaby measured: Revenue is recognised to the limit of cost. Costs are recognised when incrred. Profit is recognised at only
at completion (IFRS only)
2. Completed contract method (US GAAP only ‐ when outcome coulf not be reliably measured): Revenue, expenses and profit are rcognised at
completion
** If loss is expected, loss must be recognised immediately**
Pros and Cons of percentage of Pros: Smoother earning; better matching of revenue and expenses
completion Cons: More aggressive since revene is recorded sooner; more subjective, since it requires estimates
