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Financial Statement Analysis
45 flashcards
A derivative is a financial instrument whose value is derived from an underlying asset, such as a stock, bond, or commodity.
A pension plan is a retirement plan that provides income to employees after retirement.
A stock option is a contract that gives the holder the right to buy or sell a specified number of shares at a predetermined price.
Financial statement analysis is the process of reviewing and evaluating a company's financial statements to assess its past, current, and projected future performance.
The main financial statements analyzed are the income statement, balance sheet, and cash flow statement.
The income statement reports a company's revenues, expenses, and resulting net income or loss over a period of time.
The balance sheet is a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time.
The cash flow statement shows the inflows and outflows of cash from operating, investing, and financing activities over a period.
The main purposes are to assess a company's profitability, liquidity, solvency, efficiency, and overall financial health.
Common ratios include profitability ratios (e.g., profit margin), liquidity ratios (e.g., current ratio), solvency ratios (e.g., debt-to-equity), and efficiency ratios (e.g., asset turnover).
Horizontal analysis compares financial data across multiple time periods to identify trends over time.
Vertical analysis expresses each component of a financial statement as a percentage of a total base figure for that period.
The accrual basis recognizes revenues when earned and expenses when incurred, regardless of when cash changes hands.
The matching principle states that expenses should be matched to the associated revenues in the period in which the revenues were earned.
Depreciation is the periodic expensing of the cost of a long-lived asset over its useful life.
Contra accounts are accounts used to offset or reduce other accounts, such as accumulated depreciation for fixed assets.
Working capital is the difference between a company's current assets and current liabilities.
Accounts receivable represents amounts owed by customers for goods or services provided on credit.
Inventories are goods available for sale, in the process of production, or raw materials to be consumed.
Accounts payable represents amounts owed to suppliers or creditors for goods or services received on credit.
Retained earnings are the cumulative net income retained by the company after paying dividends.
The operating cycle is the time it takes for a company to convert cash into inventory, sell the inventory, and receive cash again.
A going concern is an entity that is expected to remain operational for the foreseeable future.
Materiality refers to the significance or importance of an item that could influence the decisions of financial statement users.
GAAP (Generally Accepted Accounting Principles) is the standard framework of guidelines for financial accounting used in a particular jurisdiction.
IFRS (International Financial Reporting Standards) is the global accounting standards adopted by many countries.
A contingent liability is a potential obligation that may arise from a past event and whose existence will be confirmed by future events.
A deferred tax asset arises from temporary differences that will result in tax deductions in future periods.
Revenue recognition is the process of determining when revenue should be recognized in the financial statements.
The time value of money is the concept that money available today is worth more than the same amount in the future due to its earning potential.
A lease is a contract that conveys the right to use an asset for a specified period in exchange for consideration.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Earnings management refers to the practice of intentionally manipulating financial results to meet specific targets or to influence perception.
A restatement is a revision of previously issued financial statements to correct a material error.
An audit is an examination of financial statements and records by an independent third party to provide reasonable assurance of their accuracy and compliance with applicable standards.
A going concern opinion is an auditor's opinion that a company may be unable to continue operating due to financial difficulties.
A qualified opinion is an auditor's opinion that the financial statements are fairly presented, except for specified exceptions or qualifications.
A disclaimer of opinion is issued when the auditor is unable to form an opinion due to a lack of sufficient audit evidence.
Fraud is an intentional act of deception, misrepresentation, or concealment for the purpose of financial or personal gain.
A related party transaction is a transaction between a company and a person or entity that has a special relationship with the company, such as a director or major shareholder.
A segment is a component of a business that engages in activities from which it may earn revenues and incur expenses, and whose operating results are regularly reviewed by management.
A discontinued operation is a component of a business that has been disposed of or classified as held for sale.
A pro forma statement is a financial statement that presents hypothetical or projected financial information based on certain assumptions or adjustments.
Risk assessment involves identifying and evaluating potential risks or uncertainties that could affect the reliability of financial statement information.
Analytical review is the process of analyzing financial and non-financial data to identify relationships, trends, or unusual fluctuations that may indicate potential issues or areas for further investigation.