Question

Financial Statement Analysis

1.5. What are the purposes of (a) the income statement, (b) the balance sheet, (c) the statement of cash flows, and (d) the statement of stockholders' equity? 1.6. Explain the importance of the notes to the financial statements. 1.7. What causes an auditor's report to be qualified? adverse? a disclaimer of opin- ion? unqualified with explanatory language? 1.8. Why is the management discussion and analysis useful to the financial analyst? 1.9. What is a proxy statement, and why is it important to the analyst? 1.10. Briefly describe the differences between the accrual basis of accounting and the cash basis of accounting.

Answer 1

1.5 a) Income statement

The purpose of This statement is to show a company's profitability during a selected or specified period of time . It calculates difference between revenue and expenses of a company which is referred to as net profit or net loss to the company

b) the balance sheet

Balance sheet is basically made to show how much a company owns (ASSETS) and how much a company owes to outsiders (LIABILITIES) and that reveals the financial status of a company

c)Cash flow statement

It is made to show from where a company has received cash and to where it has spent its cash & that reveals net cash and cash equivalents with a company

d)Statement of stockholder's equity

It is basically a part of the balance sheet which shows the changes in ownership pattern of a company's equity or change in the value of stockholder's equity from the beginning to end of an accounting period

1.6 The importance of notes is to further clarify or describe the accounting procedures used by a company to arrive at a specific accounting figure as well as to disclose information regarding any changes to a company during or after financial year ends

1.7 when an auditor is unable to complete an audit report due to any lack of proper financial information or records it given a disclaimer to report which says that he is not arrived at any proper coclusion or no opinion has been made on financial statements and Unqualified opinion is given by auditor when he thinks that the financial statements are free from any misrepresentations & Adverse opinion indicates that firms policies does not comply with that of GAAP and the financial statements are misrepresented by company that is an indication of fraud and last i.e Qualified opinion says that firms financial statements are not made in accordance with GAAP but are not at all misrepresented by company in any way , It is more like that of an unqualified opinion the only difference is that it includes an extra brief description about why it is not unqualified.

1.8 It is important because it contains the information that cannot be found in financial data and information and it basically summarizes the financials made by the company so that it can be understood in a better manner

1.9 It is basically a statement that is sent to shareholders of a company that contains information about decisions that are to be taken in annual shareholder's meeting so that they can take informed decisions about the company

1.10 The differnce between cash basis and accrual basis is that Accrual basis recognise expense when they are due regardless whether they are paid or not and recognises income when it is earned regardless whether it is received or not whereas in Cash basis of accounting , expenses are realised when it is paid whether in cash or through any other mode of payment and revenue is recorded when it is received