The objective of FS
IASB
Accounting standards for preparing FS
FASB
Relevance
Qualitative characteristics
Faithful representation
Comparability
Verifability
The international FS standard framework
Enhancing qualitative characteristics
Timeliness
Understandability
Cost of providing and using information
Constraint on FS
Important information might not be
included in the FS
Assets
Elements related to the measurement of
financial position
Liabilities
Equity
Introduction to FS
Income
Elements related to the measurement of
performance
Expenses
Accrual accounting
Underlying assumptions in FS
Going concern
The elements of FS
Means that an item is included in the FS
Recognition of FS elements
Items are recognized when it meets the
definition and satisifies the criteria for
recognition
Historical cost
Amortized cost
Current cost
Measurement of FS element
Realizable value
Present value
Fair value
BS
IS
Other comprehensive income (OCI)
Major FS
CF
Introduction to FS and FSA
Statement of changes in equity
Evaluate the past, current and potential performance and
financial performance and position of a company
Use FS prepared by companies,
combined with other information
FSA
For the purpose of making decisions
Articulate the purpose and context of the
analysis
Collect data
FSA framework
6 phases of FSA
Process data
Analyze/ Interpret the data
Follow - up
Theme of FSA
Depends on the economic decision after FSA
Whether to include the company's stock in a
portfolio or not
Scope of FSA
Making investment recommendation
Determine the creditworthiness of the
company for making/extending a loan
Example of economic decision
Assigning a debt rating
Introduction to FSA
Evaluating a M&A decision
...
Require listed companies to provide FS
information to public regularly
Stock exchanges
MD&A
Auditor's reports
Company's investor relation
Interim report
Company's earning calls
Sources of information
Presentation/ Press releases/ Speaking with
managements/ Company website, fanpage/
Company visit
Business and geographic segment reports/
Industry reports
Other financial analysts' report
Economic or industry indicators
Other sources
Identify the contract(s) with a customer
Identify the separate or disticnt
performance obligations in the contract
Rev. recognition
5 steps in recognizing rev.
Determine the trasaction price
Allocate the transaction price to the
performane obligation in the contract
Recognizing rev. when (or as) the entity
satisfies a performance obligations.
Revenue
Gross revenue
Deduction of rev.
Net rev.
Understand Rev. via company's business
model
Break down rev. into company's business
line
Cost from purchasing raw materials/ WIPs/
FG
Direct labour cost
D&A
Understand costs included in COGS
Overhead costs
Utilities costs
Maintenance cost
COGS
Others
Relationship between COGS and inventory
Selling expenses
SG&A
General and administrative expenses
Some companies provide information of expenses
grouped by nature or grouped by function.
Expenses
IS
Fixed cost
Variable cost
Capitaization of Interest costs
Component of IS
Capitalization
Capitalization of Internal development costs
Capitalization vs. Expensing
Expensing
Doubtful accounts
Issues in expense recognition
Warranties
Straight line method
D&A
Base on the D&A accounting policy
Accellerated methods
Diminishing balance method
Financial income/ Financial expenses
Interest expense
Operating profit
Financial income/ expenses
Non - operating items
IS and IS analysis
Other income/ expense
EBIT/ EBITDA
Profit before tax
Tax expense and Effective tax rate
Net income
Basic EPS
EPS
Diluted EPS
Unusual or infrequent items
Discontinued operations
Non - recurring items
Changes in accounting policy
Changes in scope and exchange rates
IS analysis
Vertical common size
Common - size analysis
Horizontal common size
IS analysis techniques
Net profit margin
Gross profit margin
IS ratios
Operating profit margin
Pretax margin
FSA
Current vs. Non current classification
FS of financial institutions (Banks/
Brokerage companies/ Insurance companies)
Liquidity - based presentation
A=L+E
E=A-L
Cash & cash equivalents
Marketable securities/ Short term
investment
Account receivables
Prepayments to suppliers
Current assets
Short term trade receivables
The allowance for doubtful account
....
BS
Inventories
Inventories
Provision for decline in value of inventories
Other CA
Assets
Long - term trade receivables
Historical cost
Tangible assets
Accumulated depreciation
PP&E
Historical cost
Intangible assets
Non - current assets
Accumulated amorization
Investment property
Financial instruments
Deferred tax assets
Goodwill
Components and format of BS
Others
ST borrowing
ST trade payables
ST advances from custoers
Current liabilities
Accrued expenses
BS and BS analysis
Deferred income
Provision for ST liabilities
Liabilities
Long term borrowing
Long - term financial liabilities
Long term account payable
Non - current liabilities
Deferred tax liabilities
Provision for Long - term payable
Capital contributed by owners
Preferred shares
Treasury shares
Equity
Retained earnings
Accumulated OCI
Noncontrolling interest
Statement of changes in equity
Vertical common size BS
Common size analysis
Horizontal common size BS
BS analysis
Liquidity ratios
Financial ratios
Solvency ratios
Capital structures
Direct CF statement
CF classifications
Indirect CF statement
Preferred
Linkages between the FS
Non cash items
D&A
Non - operating items
CFO under indirect method
NI adjusted for
Changes in DTA/DTL
CF statement
Changes in NWC
CFO
CFO under direct methods
Conversion of CFO under direct and indirect
methods
CF and CF analysis
CFI
Changes in non - current non operating
assets
CFF
Changes in non - current non operating
liabilities & Equity
Summarize
Evaluate sources and the use of cash
Common size analysis
CF analysis
Financial ratios
FCFE
Free cash flow
FCFF
Evaluating past performance
FSA applications
Projecting future financial performance
Assessing credit risk
Screening for potential equity investment
FS quality vs Earning quality
Quality spectrum of FS
Biased accounting choices in preparing FS
Conservatives vs. Aggressive accounting
Motivations
Context for assessing FS quality
Conditions conductive to issuing low quality
FS
Market regulatory authorities
FS quality
Mechanisms that discipline FS quality
Auditors
Private contracting
Detection of FS quality issue
Accounting choices and its impact on FS
items
Warning signs
Introduction to FS modelling