An income statement may also be called a statement of operations or a profit and loss statement. It provides information about a company’s business activities over a certain period of time. This includes the revenue and other income the company produced during that time, as well as the expenses required to generate that revenue.
The balance sheet lists the firm’s assets (or resources) and claims against those assets. The two basic types of claims are liabilities (to creditors) and equity (of owners).
For external stakeholders, financial statement analysis plays a major role in their economic decisions related to the company. Analysts examine the past and current performance of companies to form expectations about their future performance and to identify risks to this performance.
“Introduction to Financial Statement Analysis” is a Level I reading for the CFA Program. It covers the following learning outcomes.
International Standards permit upward revaluation of assets if the fair value of the assets increases. Typically the new value is based on an appraisal.
Earnings quality is in the eye of the beholder. It has variously been defined as :
• Earnings that reflect underlying economic effects.
• Earnings that are better estimates of cash flows.
• Earnings that are more conservative (lower).
• Earnings that are predictable.