Companies have a fair amount of discretion regarding how they will estimate their losses from customers who fail to pay, and when they will recognize the losses.
The CFA Program curriculum includes the following framework for financial statement analysis. It can be used to evaluate potential investments in a company’s securities, to determine a company’s credit-worthiness, or to evaluate the performance of its subsidiaries.
There are many sources available for analysts evaluating a company’s financial performance.
The financial statements found in company’s financial reports must be audited according to specific guidelines. The auditor must provide a written opinion called the auditor’s report.
As important as the four main financial statements are, the required notes to the statements are equally important. They provide essential information for understanding the financial statements. The notes to Apple’s 2020 financial statements run more than 20 pages, and include a variety of important information
The statement of changes in equity records changes in owners’ investments in a company over time. The main components are paid-in capital and retained earnings. Paid-in capital is the amount raised from issuing new shares. Retained earnings are any income earned by the company that is reinvested in the business.
The cash flow statement summarizes all activity in the cash accounts of the corporation. The statement user can imagine that, if one had access to the bank statements for the year, the cash flow statement could be created by sorting all transactions and summarizing them into categories.
Some companies choose to end their fiscal year on the same day of the week (for example, the Friday closest to the end of January). Companies that have weekday business hours may thus be able to take inventory and close the books over the weekend. Companies choosing this method report on what is known as a 52-53 week fiscal year-end since there will always be either 52 or 53 full weeks in each fiscal year.
While expressing the preference for the direct method, U.S. GAAP and IFRS also include the requirement that when the direct method is presented on the face of the cash flow statement, the notes to the statement must include a reconciliation of accrual accounting net income to cash from operating activities. This reconciliation constitutes the indirect method format.
The cash flow statement classifies a company’s cash flow into three categories: operating, investing, and financing. It can be used to help an analyst evaluate the company’s liquidity, solvency, and financial flexibility. It can be presented in either of two formats: direct or indirect.