International Financial Statement Analysis

Thomas R. Robinson

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119628149
• Edition: 4
• Topic: Business
• Subtopic: Investimenti e titoli
• Index: Business

Better analysis for more accurate international financial valuation International Financial Statement Analysis, 4th Edition provides the most up-to-date detail for the successful assessment of company performance and financial position regardless of country of origin. The seasoned experts at the CFA Institute offer readers a rich, clear reference, covering all aspects from financial reporting mechanics and standards to understanding income and balance sheets. Comprehensive guidance toward effective analysis techniques helps readers make real-world use of the knowledge presented, with this new third edition containing the most current standards and methods for the post-crisis world. Coverage includes the complete statement analysis process, plus information on income tax accounting, employee compensation, and the impact of foreign exchange rates on the statements of multinational corporations.

Chapter 1
Introduction to Financial Statement Analysis

Elaine Henry, PhD, CFA
Thomas R. Robinson, PhD, CFA

Learning Outcomes

After completing this chapter, you will be able to do the following:

• describe the roles of financial reporting and financial statement analysis;
• describe the roles of the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position;
• describe the importance of financial statement notes and supplementary information—including disclosures of accounting policies, methods, and estimates—and management’s commentary;
• describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls;
• identify and describe information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information;
• describe the steps in the financial statement analysis framework.

1. Introduction

Financial analysis is the process of examining a company’s performance in the context of its industry and economic environment in order to arrive at a decision or recommendation. Often, the decisions and recommendations addressed by financial analysts pertain to providing capital to companies—specifically, whether to invest in the company’s debt or equity securities and at what price. An investor in debt securities is concerned about the company’s ability to pay interest and to repay the principal lent. An investor in equity securities is an owner with a residual interest in the company and is concerned about the company’s ability to pay dividends and the likelihood that its share price will increase.

Overall, a central focus of financial analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of that capital, to profitably grow its operations, and to generate enough cash to meet obligations and pursue opportunities.

Fundamental financial analysis starts with the information found in a company’s financial reports. These financial reports include audited financial statements, additional disclosures required by regulatory authorities, and any accompanying (unaudited) commentary by management. Basic financial statement analysis—as presented in this chapter—provides a foundation that enables the analyst to better understand other information gathered from research beyond the financial reports.

This chapter is organized as follows: Section 2 discusses the scope of financial statement analysis. Section 3 describes the sources of information used in financial statement analysis, including the primary financial statements (statement of financial position or balance sheet, statement of comprehensive income, statement of changes in equity, and cash flow statement). Section 4 provides a framework for guiding the financial statement analysis process. A summary of the key points concludes the chapter.

2. Roles of Financial Reporting and Financial Statement Analysis

The role of financial statements issued by companies is to provide information about a company’s performance, financial position, and changes in financial position that is useful to a wide range of users in making economic decisions. The role of financial statement analysis is to use financial reports prepared by companies, combined with other information, to evaluate the past, current, and potential performance and financial position of a company for the purpose of making investment, credit, and other economic decisions. Managers wit...