ANALYSIS OF FINANCIAL STATEMENTS

OBJECTIVES OF THE LECTURE

A GOOD UNDERSTANDING OF WHAT IS

FINANCIAL STATEMENT ANALYSIS
NEED AND PURPOSE OF ANALYSIS

FINANCIAL REPORTING SYSTEM , STANDARD SETTING AND REGULA

BODIES
FINANCIAL STATEMENTS,PURPOSE, TYPES
OTHER SOURCES OF FINANCIAL DATA

WHAT IS FINANCIAL STATEMENT ANALYSIS

PART OF BUSINESS ANALYSIS
PROCESS OF EVALUATING A
BUSINESS ANALYSIS
COMPANYS ECONOMIC PROSPECTS
AND RISKS FOR THE PURPOSE OF
MAKING
BUSINESS
DECISION
INVESTMENT
EXTENSION OF
CREDIT
EARNINGS

RESTRUCTURING

DEBT OR EQUITY
SHORT OR LONG TERM LOANS

PREDICTIONS

MERGERS, ACQUISITION, DIVERSITIES

BUSINESS ANALYSIS

COST OF CAPITAL

BUSINESS
ENVIRONMENT AND
STRATEGY
BUSINES
S

INTRINSIC
VALUE/VALUE OF
COMPANY
PROSPECTIVE ANALYSIS
( EARNINGS)
BUSINESS
PROSPECTS
FINANCIAL
STATEMENTS

ACTIVITIES PERFORMED
INTERNA
FOR EARNING PROFITS
L
ASPECTS OR
ENVIRONMEN
EXTERNA
SURROUNDINGS OF
T
L
BUSINESS
BUSINESS
BUSINESS PLANNING IMPLIES A
STRATEGY
CAREFUL SELECTION AND
APPLICATION OF RESOURCES TO
OBTAIN COMPETITIVE ADVANTAGE IN
ANTICIPATION OF FUTUURE EVENTS

5MS
SOCIAL/LEGA
L

BUSINESS ANALYSIS
INTRINSIC
VALUE/VALUE OF
COMPANY
COST OF CAPITAL

BUSINESS
ENIVIRONMENT AND
STRATEGY
INDUSTRY
ANALYSIS

PROSPECTIVE ANALYSIS
BUSINESS
PROSPECTS
FINANCIAL
STATEMENTS
ACCOUNTING
ANALYSIS

STRATEGY
ANALYSIS

FINANCIAL ANALYSIS

PROFITABILTY

CASH FLOW

RISK ANALYSIS

FINANCIAL STATEMENTS
ANALYSIS

FINANCIAL STATEMENT
ANALYSIS

INTEGRAL AND IMPORTANT

PART OF BUSINESS ANALYSIS
THAT APPLIES ANALYTICAL
TOOLS AND TECHNIQUES, TO

FINANCIAL STATEMENTS
AND RELATED DATA

TO DERIVE
ESTIMATES
AND
INFERENCE,
USEFUL IN BUSINESS
ANALYSIS.

CONT

FINANCIAL STATEMENT
ANALYSIS
ANALYSING THE
INFORMATION PROVIDED IN
THE
FINANCIAL STATEMENTS
TO
ASSESS THE
ORGANISATION
PAST
PERFORMA
NCE
PRESENT
CONDITION
FUTURE
PERFORMANC
E

EARNINGS
IN TERMS OF POWER,
PERSISTENCE,
QUALITY AND
GROWTH
SOLVENCY
SHORT AND LONG
TERM

WHY THERE IS A NEED OF FINANCIAL STATEMENT

ANALYSIS

PROFITABLI
TY/EARNING
S

SURVIVAL/
SOLVENCY

ANALYSIS PROVIDE OWNERS

AND OTHER PARTIES

BETTER INFORMATION ABOUT SUCH KEY FACTORS FOR

DECISION MAKING AND ULTIMATE BUSINESS SURVIVAL

PURPOSE OF FINANCIAL STATEMENT ANALYSIS

TO USE FINANCIAL
STATEMENTS TO
EVALUATE AN
ORGANISATIONS
FINANCIAL
PERFORMANCE
FINANCIAL POSITION.

BY MEANS OF
COMPARATIVE ANALYSIS
ACROSS TIME IN TERMS
OF:
INTRACOMPANY BASIS
(WITHIN THE COMPANY
ITSELF)
INTERCOMPANY BASIS
(BETWEEN COMPANIES)
INDUSTRY AVERAGES
(AGAINST THAT
PARTICULAR INDUSTRYS
AVERAGES)

EFFECTIVE FINANCIAL STATEMENT ANALYSIS

TO PERFORM EFFCETIVE FINANCIAL STATEMENT
ANALYSIS
AWARENESS OF
ORGANIZATION
FACTORS
BUSINESS
STRATEGY
ORGANIZATION
OBJECIVES
ANNUAL
REPORTS
BUSINESS
REVIEWS

NATURE OF
INDUSTRY

ECONOMIC
CONDITION
S

THE PRIMARY SOURCE OF INFORMATION FOR FINANCIAL

ANALYSIS.
FINANCIAL STATEMENTS
QUALITY OF FINANCIAL ANALYSIS DEPENDS UPON THE
RELIABILITY OF FINANCIAL STATEMENTS
FINANCIAL REPORTING SYSYTEM
ACCOUNITNG PROCESS THAT GENERATES FINANCIAL
INFORMATION
FINANCIAL
STATEMENT
S

STANDARD
S

OTHER SOURCES
OF FINANCIAL
DATA

FINANCIAL
STATEMENT
S

STANDARD
S

OTHER SOURCES
OF FINANCIAL
DATA

PROVIDE INFORMATION ABOUT THE FINANCIAL POSITION,

PERFORMANCE,
BALANCE SHEET
INCOME STATEMENT
COMPREHENSIVE
INCOME STATEMENT
STATEMENT OF
CHANGES IN
OWNERS EQUITY
CASH FLOW
STATEMENT
NOTES TO THE
FINANCIAL
STATEMENTS
www.footnoted.org

STATEMENT OF
FINANCIAL POSITION
FINANCIAL
PERFORMANCE
INCREASE OR DECREASE IN NET
ASSTS
FLOW OF CASH
EXPLANATORY INFORMATION ABOUT
ITEMS PRESENTED IN OTHER
COMPONENTS OF THE FINANCIAL
STATEMENTS, ACCOUNTING POLICIES

FINANCIAL
STATEMENT
S

STANDARD
S

OTHER SOURCES OF
FINANCIAL DATA

BUSINESS LANGUAGE
NEED

FINANCIAL REPORTING REQUIRES POLICY

CHOICES AND ESTIMATES. THESE CHOICES AND
ESTIMATES REQUIRE JUDGMENT, WHICH CAN
VARY FROM ONE PREPARER TO THE NEXT
GLOBALIZATION

FASB

GAAP

IASB/IAS
C

IFRS

CONVERGANC
E

NORWALK
AGREEMENT
(2007)

FINANCIAL
STATEMENT
S

STANDARD
S

OTHER
SOURCES OF
FINANCIAL
DATA

MD & A OR FINANCIAL REVIEW CHAP 24 KIESO

VOL2

Commitments for capital expenditures, the purpose of such

commitments, and expected sources of funding
Anticipated changes in the mix and cost of financing
resources
Events causing material changes in cost/revenue
relationships (e.g. future price increase)
Unusual or infrequent transactions that affect income from
continuing operations

AUDIT REPORT
IS DEFINED AS INDEPENDENT EXAMINATION OF BOOKS OF
ACCOUNTS AND RECORDS OF AN ENTITY WHETHER PROFIT
ORIENTED OR NOT IRRESPECT OF ITS LEGAL SIZE OR FORM,
WITH AN OBJECTIVE TO GIVE AN OPINION ABOUT THE
FAIRNESS OF FINANCIAL STATEMENTS, WHETHER OR NOT
THEY REFLECT TRUE AND FAIR VIEW OF COMPANYS
FINANCIAL POSITION AND PERFORMANCE

NEED

IT IS COMPULSORY FOR LIMITED COMPANIES

TO GET THEIR ACCOUNTS AUDITED BY
CHARTERED ACCOUNTANTS UNDER
COMPANIES ORDINANCE 1984, BANKING
COMPANIES ORDINANCE 1962, INSURANCE
ACT 1938, AND COOPERATIVE SOCIETIES RULES
1927.

Principal means of communication

Produced annually by companies
Increasing in size and importance
Aimed primarily at shareholders
Needs of other users being recognised
Contains quantitative and qualitative info.

Financial Information Analysis

18

Copyright 2006 John Wiley &

Sons Ltd

CONTENTS OF ANNUAL
CONTENT CONTROLLED BY STATUTE, REGULATION, IFRS
REPORT
VISION & MISSION
INTRODUCTION OF COMPANY
DIRECTOR / CHAIRMANS REVIEW
STATEMENTS OF COMPLIANCE WITH THE NARRATIVE
CODE
REPORTS
OF CORPORATE GOVERNANCE
AUDIT REPORT
FINANCIAL STATEMENTS

VISION & MISSION

A VISION STATEMENT
OUTLINES WHERE BUSINESS
WANT TO BE. COMMUNICATES
BOTH THE PURPOSE AND
VALUES OF YOUR BUSINESS.
A MISSION STATEMENT TALKS
ABOUT HOW WILL BUSINESS
GET WHERE IT WANTS TO BE.
DEFINES THE PURPOSE AND
PRIMARY OBJECTIVES
RELATED CUSTOMER NEEDS
AND TEAM VALUES.

INTRODUCTION OF COMPANY
HISTORY
COMPANY INFORMATION
PRODUCT LINE
BOARD OF DIRECTORS
NAME
BANKERS
NAME OF
AUDITORS
NAME OF LEGAL
ADVISORS
AUDIT COMMITTEE
MEMBERS
NAME OF
DIRECTORS,CFO
STRATEGIC
OBJECTIVES
ORGANIZATION
CHART
OFFICIAL
ADDRESSES
SHARE HOLDER INFORMATION(AGM,DIVIDEND
PAYMENT,LISTING,STOCK CODE)

DIRECTOR / CHAIRMANS REVIEW/MD&A

A SECTION OF A COMPANY'S ANNUAL REPORT IN
WHICH MANAGEMENT DISCUSSES NUMEROUS
ASPECTS OF THE COMPANY, BOTH PAST AND
PRESENT.
STARTING POINT TO UNDERSTAND BUSINESS PLAN
STRATEGY
AND ENVIRONMENT
BUSINESS REVIEW/FINANCIAL HIGHLIGHTS
CORPORATE SOCIAL RESPONSIBILTY
STRENGTHS AND WEAKNESSES OF COMPANY
BUSINESS PROSPECTS

CHAIRMANS REPORT
NOT MANDATORY
PERSONAL PERSPECTIVE
COMMENTS ON MACRO CONTEXTS
BRIEF ACCOUNT OF COMPANYS FINANCAL AND OPERATING
PERFORMANCE
DETAIL OF ANY SIGNIFICANT EVENT THAT HAD A MATERIAL EFFCET
ON PERFORMANCE

REFERENCES TO CHANGES IN BOARD MEMBERSHIP

DIRECTORS REPORT
MANDATORY
CONTENTS
ACTIVITIES AND TRADING RESULTS
DEVELOPMENT DURING THE PERIOD
ABOUT DIRECTORS
EMPLOYEES (NUMBER,HEALTH AND SAFETY POLICY)
CORPORATE GOVERNANCE
ELEMENTS MAY BE COMMENTED UPON BY AUDITOR

STATEMENTS OF COMPLIANCE WITH THE

CODE OF CORPORATE GOVERNANCE
THE FRAMEWORK OF RULES AND
PRACTICES BY WHICH A
BOARD OF DIRECTORS ENSURES
ACCOUNTABILITY, FAIRNESS, AND
TRANSPARENCY IN A COMPANY'S
RELATIONSHIP WITH ITS ALL
STAKEHOLDERS (FINANCIERS,
CUSTOMERS, MANAGEMENT,
EMPLOYEES, GOVERNMENT, AND THE
COMMUNITY).

AUDIT REPORT
MANDATORY REPORT

IS A WRITTEN INDEPENDENT OPINION OF AN

AUDITOR REGARDING WHETHER AN
ENTITY'S FINANCIAL STATEMENTS PRESENT
FAIRLY ITS FINANCIAL POSITION.
THIS IS WRITTEN IN A STANDARD FORMAT, AS
MANDATED BY GENERALLY ACCEPTED
AUDITING STANDARDS (GAAS) OR ISA

TYPES OF AUDIT
REPPORT
ON THE BASIS OF
OPINIION

STANDARD/
UNQUALIFIED
/
UNMODIFIED
MODIFIED/
QUALIFIED
REPORT

CLEAN
OPINION

OPINION IS
CLEAN BUT
WITH SOME
EMPHASSIS

OPINION IS NOT
CLEAN

FINANCIAL STATEMENTS
BALANCE SHEET
INCOME STATEMENT
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF CASH FLOWS
NOTES TO THE FINANCIAL STATEMENTS