CFA L1 FSA Financial Statement Analysis考试复习资料.doc

Financial Statement Analysis (Introduction)Role of Financial Reporting (IAS B): provide financial information; investors, lenders, creditors; transactionRole of Financial Statement Analysis: make economic decisions; evaluate performanceKey Financial Statements:1.Income statement: dynamic statement(between 2 balance sheet). 3 catagories: revenues (inflows: sales from core operation), expenses (outflows), other income includes gains and losses2.Statement of comprehensive income: all changes in equity except for shareholder transactions (issue, buyback, dividends)3.Balance sheet (at a point in time): assets(controlled by firminflow)=liabilities(owed to lendersoutflows)+owners equity(assets-liabilities)4.Cash flow statement: dynamic statement(between 2 balance sheet) CFO(core activities), CFI(buy equipment investment in other firms), CFF(issue & buy debts & equity + dividends(GAAP)5.Statement of changes in owners equity: issue & buyback shares, dividends, other comprehensive incomeFootnotes&Supplementary Schedules: basis of presentation; accounting methods&assumptions; further information (pension, etc.); contingencies(liability depending on future event); legal proceedings; stock options; significant cutomers; segment data; quarterly data(U.S.), semiannually(Euro); related-party transactionsManagement Discussion&Analysis (some part unaudited): nature of the business; results from operation; trends going forward; capital resources&liquidity; cash flow trends; accounting method choices; effects of risk(inflation, etc.)Audit report: independent(not by company); need cost; confirm statements free from material errors Opinion(4):unqualified(clean); qualified(disagree with accounting principles, only exception); adverse(disagree totally); disclaimer of opinion(cant form opinion) internal controlsminimize risk of fraud(only U.S.) Std opinion: 1.independent review 2.IFRS(IS) GAAP(no material error) 3.reasonable accounting principles and estimatesSupplementary sources of information: quarterly, semi annual reports; proxy statements(to shareholder before vote); corporate reports. Press releases; economic, industry dataFinancial statement analysis framework: 1.purpose&context of analysis 2.collect data 3.process data 4.analyze/interpret data 5.conclusions&recommendations 6.update periodicallyFinancial Reporting MechanicsAssets: cash (or equivalents90days); accounts/trade receivable; prepaid expenses(paid not yet used); inventory(raw materials, working progress, finished goods); PP&E(tangible); investment property(for investment purpose, buy house&rent out); intangibles; financial assets(investment securities); investment under the equity method; deferred tax assets(pay more tax now)Liability: accounts/trade payable; provisions/accrued(not show up in balance sheet) liabilities; financial liabilities(notes payable, etc.); current&deferred tax(less tax now); unearned revenue(paid but service not completely give out); debt payable; bondsEquity: capital at par value; additional paid-in capital(amounts above par when issue shares); retained earnings(+net income-dividend paid); other comprehensive income; noncontrolling (minority) interest (group balance sheet include what you control but not what you own)Revenue: sales(products&services); gains(dispose of PP&E, intangibles, etc. sell above balance sheet value); investment income(dividends, capital gains&losses)Expense: COGS; SG&A expense(rent, salaries, etc.); depreciation(PP&E)/amortization(intangibles); interest; tax expense(include deferred tax assets/liability); lossesAccounting EquationsRevenue-expenses=net incomeAssets=liabilities+owners equity; (Assets-liabilities)/net assets=owners equityOwners equity=contributed capital(par value+additional paid-in capital)+retained earnings Beginning retained earnings+net income(revenue-expense)-dividend=Ending retained earningsAccounting for Transactions(double-entry)1. pay a bill: asset(cash); liability(trade payables); equity; E=A-L2. sell a bond: asset; liability; equity; E=A-L3. make a credit sale: asset(inventory); asset(accounts receivable); liability; equity(retained earnings); E=A-L(income statement: revenues increase; expenses increase by less; net income&retained earnings increase; retained earnings is an equity account)4. buy materials on credit: asset; liability; equity; E=A-L5. issue stock: asset; liability; equity; E=A-L6. incur an expense: asset; liability; equity; E=A-L7. pay a liabiltiy: asset; liability; equity; E=A-L8. declare divident: asset; liability; equity; E=A-L9. pay dividend: asset; liability; equity; E=A-LAccruals&Valuation AdjustmentsAssets: bad/doubtful debts(accounts receivable); prepaid expenses; unbilled(accrued) revenue(not account receivable); impairments(fair valuecarrying value; asset)/writedowns(inventory; sale pricecost; inventory); mark-to-market investments(available for sale; trading securities)Liabilities: accrued expenses(telephone bill); unearned (deferred) revenue (customer pays in advance); provisionsRelationships among statementsAccounting System FlowJournal entriesLedger T accountsTrial balanceJournal adjustments(depreciation of PP&E, impairments, write down, provisions, mark-to-market adjustments, etc.)Adjusted trial balanceFinancial statementsStatements&Security AnalysisFinancial statements contain estimates&judgements(accruals&valuation)Review MDA&footnotes(accounting policies&estimates)Financial Reporting StandardsObjective of Financial Statements: provide resources for decision makingFinancial Accounting Standard SettingAccounting Stds: FASB(U.S.)/IASB(most other countries)(assume IASB unless stated)Desirable Attributes of Std. Setters: professional; adequate authority, resources&competencies; clear&consistent std. setting process; well-articulated framework; operate independently; not compromised; decisions of public interestFinancial Reporting Requirements&Regulation: Securities&Exchange Commission (SEC)-U.S.; Financial Services Authority (FSA)-U.K.;International Organization of Securities Commissions (IOSCO)-many othersIOSCO core objectives: 1.protect investors; 2.fair, transparent, efficient markets; 3.reduce systematic riskSEC Filings/Forms: S1(new securities to public); 10K(annual report); 10Q(quarterly report); DEF 14A(proxy statement); 8K(material events); Form 144(stock issues to qualified buyers without SEC registration); Forms 3,4&5(share dealings with corporate insiders)Convergence Between IASB&FASB: 1.increase comparability 2.decrease problems&expenses of raising capital in foreign markets; 3.decrease problems&expenses of preparing consolidated financial statements for foreign subsidiariesBarriers to Convergence: 1.Differences in view 2.Pressure from business&industry groups 3.many countries involvedIFRS Conceptual Framework2 qualitative characteristics: 1.Relevance(provide useful information with predictive value, confirmatory value or both; materiality is an aspect of relevance); 2.Faithful representation(complete, neutral, free from error; characteristics: comparability, verifiability(auditable), timeliness, understandability)Constraints: trade-offs: relevance(in time) VS. verifiability(accurate); benefits VS. costs; excludes non-quantifiable informationIFRS Required Reporting Elements: future benefit probable+items value/cost measured reliablyAssets(probable future benefits flow); Liabilities(settlements probable outflow); Equity(residual interest; A-L); Income (increases in economic benefitsincrease in equity); Expenses (decreases in economic benefitsdecrease in equity)IASB General Requirements IAS 1: required financial statement: balance sheet; income statement; statement of comprehensive income; change in equity; cash flow statement; footnotes (accounting policies, notes) fundamental principles: fair presentation; going concern; accrual basis(revenue rather than money); consistency; materiality presentation requirements: aggregation(when appropriate); no offsetting; classified balance sheet(group transactions together); minimum information on face(primary statement); minimum disclosure; comparative info; at least annuallyIFRS/U.S.GAAP Framework Differences: Framework: IASBincome&expenses; FASBrevenues, expenses, gains, losses, comprehensive income Asset: IASBfuture economic benefit; FASBfuture economic benefit expected to flow (use ”probable”) Upward valuation: FASBNO to most assetsCharacteristics of a Coherent Reporting Framework: transparency(full disclosure&fair presentation); comprehensiveness(all types of transactions); consistency(across companies&time)Barriers to a Single Framework: 1.Valuation (historic cost minimal judgement; fair value considerable judgement) 2.Std. setting (3: principle-based(IFRS); rules-based(GAAP); objectives-based(toward) 3.Measurement (2: balance sheet: asset/liability; income statement: revenue/expense)Monitoring Development: reporting std. evolving; focus on financial reports Monitor: new products/transactions; std. setter/regulator actions; company disclosure: MD&A; footnotesCompany Disclosures: accounting policies; accounting estimates; changes in accounting policy; footnote disclosure&discussion in MD&AUnderstanding Income StatementsIncome statements(a.k.a. statement of operations; statement of earnings; profit&loss statement)(dynamic) Revenue-Expenses=Net Income (IFRS: may combine with comprehensive income items)2 types: single step; multi-stepRevenues (sale of goods&services in normal business; net revenue = revenue - adjustments for estimated returns&allowances)Expenses (to generate revenue, including COGS, operating expenses, interest, taxes)Gains and losses (typically arise on the disposal of long-lived assets)Multi-step Income StatementIASB Requirements for Revenue Recognition1. Risk&reward of ownership transferred2. No continuing control/management over the good sold3. Reliable revenue measurement4. Probable flow of economic benefits5. Cost can be measured reliablyIASB Requirements for Revenue Recognition for servicesWhen outcome can be measured reliably, revenue will be recognized by the stage of completionSEC Requirements for Revenue RecognitionRevenue be recognized when realizable and earned (FASB)SEC additional guidance: 1.arrangement evidence between buyer&seller; 2.completion of the earning process (delivered) 3.price determined 4.assurance of paymentRevenue Recognition MethodsSales-basis method (good/service provided at time of sale, cash/credit with high payment prob.)Exceptions(construction contracts):1.percentage-of-completion method(IFRS&GAAP); 2.completed-contract method(GAAP)all recognized when project is completed (IFRS: report revenue but no profit)3.installment sales method(GAAP) not sure if customer pay4.cost recovery method (COGS unknown+not sure if customer pay)Barter Transactions(exchange of goods): IFRS:revenue=fair value of similar non-barter transactions with unrelated parties; GAAP:revenue=fair value ONLY IF received cash payments for such services historically (otherwise record sale at carrying value of asset)Gross(GAAP: if company: primary obligator; bear inventory risk, credit risk; can choose supplier; has latitude to set price) VS. Net Reporting Answer is: BExpense RecognitionAccrual basis-matching principle (match costs against associated revenues)e.g. inventory; depreciation/amortization, etc.Period expenses(expenditures that less directly match the timing of revenues) e.g. admin costsInventories: Matching Principle (FIFO, LIFO(GAAP only), Avg. cost, Specific identification)Beginning inventory + Purchase Ending inventory = COGS Depreciation Method (match to assets decrease in value over time) (GAAP can choose whichever you like: accelerated/straight-line depreciation; IFRS requires the rational one)Amortization (intangible assets, e.g. patents): IFRS&GAAP amortize straight-line without residual value; goodwill no amortize but check for impairment/yearlyUnusual/Infrequent Items (above the tax line) include gain(loss) from disposal of a business segment/assets; gain(loss) from sale of investment in subsidiary; provisions for environmental remediation; impairments, write-offs(obsolete), write-downs(valuecost), restructuring; integration expense for recently acquired businessDiscontinued Operations (management decided to dispose of but 1.not done yet/2.did so in current year after it generated profit/loss): reported net of taxes after net income from continuing operations (below the line)Extraodinary Items (GAAP only)(unusual&infrequent)(below the line) include losses from expropriation of assets; gains/losses from early retirement of debt; uninsured losses from natural disastersAccounting Changes(2): 1.change in accounting principle(e.g. LIFO to FIFO)(require prior years data shown in financial statements to be adjusted); 2.change in accounting estimate(no need to go back; disclose in footnotes)Non-Operating Items (depends on whether it is among core activities or not)Financial service companies: interest, dividends, gains/losses on disposaloperating activitiesSimple VS. Complex Capital StructuresSimpleno potentially dilutive securities(report only basic EPS); Complexhas(report= both)Potentially dilutive securities: Stock options(not traded); Warrants(new shares); Convertible debt; convertible preferred stockDilutive securitiesdecrease EPS; Antidilutive securitiesincrease EPSBasic EPS = (Net income-preferred dividends)/weighted avg. #common stock(common stock dividends not subtracted)Stock Dividends&Stock SplitsDiluted EPS = (net income-preferred dividends)+(convertible preferred dividend)+(convertible debt interest)(1-t)/(weighted avg. shares)+(shares from conversion of conv. pfd. shares)+(shares from conversion of conv. debt)+(shares issuable from options/warrants)Conv. Pfd: is dividend/new sharesbasic?Conv.debt: is interest (1-t)/new sharesex. Price?Dilutive Stock Options-Treasury Stock Method: steps:1. Calculate number of common shares created if options are exercised; 2.Calculate cash received from exercise; 3.Calculate number of shares that can be purchased at the avg. market price with sale proceeds; 4.Calculate net increase in common shares outstandingExample: Dilutive Employee Stock OptionsAnswer: Diluted EPS: $2.29Vertical Common-Size Income Statements (move absolute figures to relative figures)Comprehensive Income = Net income + Other comprehensive income (CHANGES of Foreign currency translation adjustment; Minimum pension liability adjustment; Unrealized gains/losses on derivatives contracts accounted for as hedges; Unrealized gains&losses on available for sale securities)Understanding Balance SheetsComponents&Format of Balance SheetAssets(probable future flow of future economic benefit to the entity; measureable with reliability):Cash&equivalents(90d); Inventories(raw materials + working progress + fininshed goods);Trade(sold+not yet collected cash)&other receivables(any other from third parites); Prepaid expenses(paid not yet used); Financial assets(debt&equity instrument held in other companies);Deferred tax assets;Longer-lived assets:PP&E(tangible fixed assets);Investment property(IFRS only; rent/appreciation) (ONLY IFRS);Intangible assets(patents, etc.);Equity a/c investments;Natural resources(oil, etc.);Assets held for sale(PP&E, intangibles decided to dispose)Liabilities(probable sacrifice of future economic benefit to the entity; amounts received but not reported as revenue in the income statement(deferred/unearned revenue); amounts reported as expenses but which have not been paid)Bank borrowings(loans);Notes payable(short interest bearing forms of debt);Provisions(future expenses);Unearned revenues(customer paid + not yet met earnings of criteria);Accounts payable(bought not yet paid);Financial liabilities(company issued bonds; leases company taken out);Accrued liabilities(used not yet invoiced/paid);Deferred tax liabilities;Equity(Permanent; No mandatory charges against earnings; Legal subordination to creditors)(A-L)(Net assets)=EBalance Sheet AnalysisUses of balance sheet analysis: assess liquidity(ability to pay-off short term liabilities), solvency (debt to equity), ability to make distributions to shareholders(pmt to shareholders)Limitations: mixed measurement conventions(historic cost; amortized cost; fair value); fair values may change after balance sheet data; not include off-balance-sheet assets&liabilitiesBalance Sheet FormatReport format(asset, liabilities, equity single column)Account format(assets on the left; liabilities&equity on the right)Both are Classified balance sheet(accounts group into sub-categories; liquidity-based presentation)Current assets(cash&othe assets will likely be converted into cash/used up within 1y/1 operating cycle, whichever is greater): presented in the order of liquidity(GAAP: most liquid on top, end up with intangibles; IFRS: least liquid first, end up with cash); reveal info abt operating activities/capacity of the firmCash&cash equivalents;Marketable securities (held-to-maturityamortized cost; available-for-sale/trading securitiesfair value);Accounts receivable/trade receivables: net realizable value(NRV)(amounts owed by customers bad debt provision);Inventories(Raw materials+work in process+finished goods, manufacturing(stdandardized costs), cost flow meth