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Cfa1 4 Financial Reporting And Analysis Notes

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This is an extract of our Cfa1 4 Financial Reporting And Analysis document, which we sell as part of our CFA Level 1 Notes collection written by the top tier of University Of London (examined By LSE) students.

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CFA Level 1

Financial Reporting and Analysis

Financial Statements
Role of Financial Reporting
 Provide info for investment decision making
 Provide info about financial performance / position or any changes
Scopes of Decision Making
 Equity Investment
 M&A
 Subsidiaries
 Venture Capital / Private Equity Investment
 Credit Rating
 Compliance
 Debt Rating
 Cash Flow Forecast
 The ability to meet short-term obligations
 The ability to meet long-term obligations
Financial Statements
 Income Statement
 Balance Sheet
 Cash Flow Statement
 Statement of Changes in Owners' Equity
 Financial Notes and Supplementary Schedules
 Management's Discussion and Analysis (Listed Companies)
 Auditor's Reports
 Management Report on Internal Control (Sarbanes-Oxley Act)
Income Statement
 Provide info on financial results (performance) over a period of time
 Report revenue and expenses
 Net Income = Revenue - Expenses
Balance Sheet
 Provide info on financial positions at a specific point in time
 Owners' Equity = Assets - Liabilities 1 CFA Level 1

Financial Reporting and Analysis

Cash Flow Statement
 Provide info on financial flexibility
 Cash inflows / outflows derive from operating, investing and financing activities
Auditor's Report
 Unqualified Opinion (FS gives True / Fair View)
 Qualified Opinion (Some Limitations / Exceptions to Accounting Standards)
 Adverse Opinion (FS materially departs from Accounting Standards)
 Disclaimer of Opinion (Auditor are Unable to Issue an Opinion)
Accounting Organizations
 International Accounting Standard Board (London)
 International Financial Reporting Standards (IFRS)
 Framework for the Preparation and Presentation of Financial Statements
 Financial Accounting Standard Board (FASB) (U.S.)
 Statements of Financial Accounting Standards (U.S. GAAP)
Other Sources of Information
 Interim Report (Unaudited)
 Provide update info on financial position / performance
Proxy Statement
 Provide info on voting / management / stock performance / disclosures
Financial Statement Analysis Framework
 Articulate Purpose and Context of Analysis
 Collect Data
 Process Data
 Analyze / Interpret Processed Data
 Develop / Communicate Conclusions and Recommendations
 Follow Up
Phase 1: Articulate Purpose and Context of Analysis
 Determine the Nature
 Communicate with Client
 Gather Institutional Guidelines
 Provide Statement of Purpose / Objective
 Formulate Questions
 Provide Timetable 2 CFA Level 1

Financial Reporting and Analysis

Phase 2: Collect Data
 Financial Statements
 Industry / Economic Data
 Discussions with Stakeholders
 Site Visits
Phase 3: Top-down Approach to Data Collection
 Analyze the Macroeconomic Environment
 Analyze Industrial Competitive Environment
 Analyze the Company
Phase 4: Process Data
 Evaluate Financial Statements
 Make Adjustments
 Compute Financial Ratios / Graphs / Forecasts
Phase 5: Analyze / Interpret Processed Data
 Give Analytical Results
Phase 6: Develop / Communicate Conclusions and Recommendations
 Provide Reports
 Offer Recommendations
Phase 7: Follow Up
 Update Reports
Components of Equity Analyst Report
 Summary and Investment Conclusion
 Business Summary
 Risks
 Valuation
 Historical and Pro Forma Tables
Financial Reporting
Business Activities
 Operating Activities (Daily Business Functioning)
 Investing Activities Acquisition / Disposal of Long-term Assets
 Financing Activities (Obtaining / Repaying Capital)

3 CFA Level 1

Financial Reporting and Analysis

Items in Balance Sheet
 Assets (Economic Resources)
 Liabilities (Creditors' Claims on Economic Resources)
 Owner's Equity (Residual Claims on Economic Resources)
Items in Income Statement
 Revenue (Inflows of Economic Resources)
 Expenses (Outflows of Economic Resources)
 Net Income
Types of Assets
 Current Assets (Inventory, Trade Receivables, Prepaid Expenses, Cash)
 Noncurrent Assets (Property, Plant, Equipment)
 Intangible Assets (Patents, Trademarks, Licenses, Copyright, Goodwill)
 Financial Assets (Trading Securities, Investment Securities, Derivatives)
Current Liabilities
 Trade Payables
 Accrued Liabilities
 Tax liabilities (Current, Deferred)
 Minority Interests
 Unearned Revenue
 Debt / Bond Payable
Owners' Equity
 Capital
 Non-Current Liabilities
 Retained Earnings
 Reserve Liabilities
 Sales Revenue
 Gains
 Investment Income (Interest, Dividend)
 Cost of Goods Sold
 Selling / General / Administrative Expenses
 Depreciation / Amortization
 Interest / Tax / Dividend Expenses 4 CFA Level 1

Financial Reporting and Analysis

 Bad Debt / Losses
Accounting Equations
 Owners' Equity = Assets - Liabilities
 Owners' Equity = Contributed Capital + Ending Retained Earnings
 Net Income = Revenue - Expenses
 Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
Contra Accounts
 Used for entries that offset some part of the value of another account
 Equipment (Asset) is offset in Depreciation (Expense)
Accrual Accounting
 Unearned (Deferred) Revenue
 Accrued (Unbilled) Revenue
 Prepaid Expenses
 Accrued Expenses
Valuation Adjustments
 Adjust the values of assets / liabilities when required by accounting standards
Flow of Info in an Accounting System
 Journal Entries / Adjusting Entries (business transactions sorted by date)
 General Ledger / T-accounts (business transactions sorted by account)
 Trial Balance / Adjusted Trial Balance (ending account balances)
 Financial Statements
Financial Reporting Standards
Standard-Setting Bodies (Private Sector Organization)
 International Accounting Standards Board (IASB)
 Financial Accounting Standards Board (FASB)
 International Organization of Securities Commission (IOSCO)
Regulatory Authorities
 Securities and Exchange Commission (SEC) (U.S.)
 Financial Services Authority (FSA) (UK)
 European Securities Committee (ESC) (EU)
Objectives of IOSCO
5 CFA Level 1

Financial Reporting and Analysis

 Protect investors
 Ensure fairness, efficiency and transparency of markets
 Reduce systematic risk
Significant Legislation
 Securities Act 1933
 Securities Exchange Act 1934 (creation of SEC)
 Sarbanes-Oxley Act 2002 (creation of Public Company Accounting Oversight Board)
SEC Filings
 Securities Offerings Registration Statement
 Forms 10-K (US Registrant), 20-F (Non US Registrant), 40-F (Canadian Registrant)
 Annual Report
 Proxy Statement / Form DEF-14A
 Forms 10-Q / 6-K (Interim Reports)
Other Filings
 Form 8-K (Interim Report on Corporate Event)
 Form 144 (Proposed Sale of Restricted Securities)
 Forms 3, 4, and 5 (Beneficial Ownership of Securities)
 Form 11-K (Annual Report of Employee Stock Purchase)
Qualitative Characteristics of Financial Statements
 Understandability
 Relevance (Materiality)
 Reliability (Faithful, Substance over Form, Neutral, Prudent, Complete)
 Comparability (Over Time / Across Companies)
Constraints on Financial Statements
 Time
 Cost
Measurement of FS Elements
 Historical Cost
 Current Cost (Cost to Replace an Asset)
 Realizable (Settlement) Value (Sold Items)
 Present Value (Discounted)
 Fair Value (Expected Value of an Item if Sold)
FS Fundamental Principles 6 CFA Level 1

Financial Reporting and Analysis

Fair Presentation
Going Concern
Accrual Basis

Presentation Requirements
 Aggregation (of similar items)
 Separation (of dissimilar items)
 No offsetting
 Classified Balance Sheet (Current / Noncurrent)
 Min Info
 Comparative Info (info of previous years)
Disclosure in FS Notes
 Accounting Policies
 Estimated Uncertainty
 Description of Company
 Nature of Operations
 Parent Company
FASB Framework vs IASB Framework
Purpose of the Framework
 Both have similar a purpose
 Purpose of IASB Framework is at the top of GAAP but FASB is not
FS Objectives
 Both focus on providing relevant info
 Same objectives for business / non-business FS in IASB, but different in FASB,
Underlying Assumption
 IASB gives more emphasis on accrual and going concern assumptions
Primary Qualitative Characteristics
 IASB: Relevance, Reliability, Comparability, Understandability
 FASB Primary: Relevance, Reliability
 FASB Secondary: Comparability, Understandability
Standard Setting Approach 7

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