1. 15
Financial Statement Analysis
Principles of Financial Accounting with Conceptual
Emphasis on IFRS
Reeve Warren Duchac Wang
©2011 Cengage Learning

2. Learning Objective
Financial Statement Analysis 1 3-1
After studying this chapter, you should be able to:
Describe basic financial statement
1 Insert Chapter Objectives
analytical methods.
Describe the nature of the
2 Use financial statement analysis to
assess the solvency of a business.
adjusting process.
3 Use financial statement analysis to
assess the profitability of a business.
4 Describe the contents of corporate annual
reports.
15-2
15-2

3. 1
Describe basic financial
statement analytical
methods.
15-3
15-3

4. 1
Basic Analytical Methods
Users analyze a company’s financial
statements using a variety of analytical
methods. Three such methods are as follows:
1. Horizontal analysis
2. Vertical analysis
3. Common-sized statements
15-4

5. 1
Horizontal Analysis
The percentage analysis of increases
and decreases in related items in
comparative financial statements is
called horizontal analysis.
15-5

6. 1
Exhibit 1
Comparative
Statement of
Financial
Position—
Horizontal
Analysis
15-6

7. 1
Exhibit 1
Comparative
Statement of
Financial
Position—
Horizontal
Analysis
Horizontal Analysis:
Difference $17,000
= 3.2%
Base year (2009) $533,000
15-7

8. 1
Comparative Schedule of Current
Exhibit 2
Assets—Horizontal Analysis
15-8

9. 1
Comparative Schedule of Current
Exhibit 2
Assets—Horizontal Analysis
Horizontal Analysis:
Difference $25,800
= 39.9%
Base year (2009) $64,700
15-9

10. 1
Comparative Statement of Comprehensive
Exhibit 3
Income—Horizontal Analysis
15-10

11. 1
Comparative Statement of Comprehensive
Exhibit 3
Income—Horizontal Analysis
Horizontal Analysis:
Increase amount $296,500
= 24.0%
Base year (2009) $1,234,000
15-11

12. 1
Comparative Statement of Retained Earnings
Exhibit 4
—Horizontal Analysis
Horizontal Analysis:
Increase amount $37,500
= 37.5%
Base year (2009) $100,000
15-12

13. Example Exercise 15-1 1
Horizontal Analysis
The comparative cash and accounts receivable balances for a
company are provided below.
2010 2009
Cash $62,500 $50,000
Accounts receivable (net) 74,400 80,000
Based on this information, what is the amount and percentage
of increase or decrease that would be shown in a statement of
financial position with horizontal analysis?
Follow My Example 15-1
Cash $12,500 increase ($62,500 – $50,000), or 25%
Accounts receivable $5,600 decrease ($74,400 – $80,000), or (7%)
Follow My Example 6-1
15-13 For Practice: PE 15-1A, PE 15-1B
15-13

14. 1
Vertical Analysis
The percentage analysis of the
relationship of each component in a
financial statement to a total within
the statement is called vertical
analysis.
15-14

15. 1
Vertical Analysis of Statement of
Financial Position
In a vertical analysis of the statement
of comprehensive income, each asset
item is stated as a percent of the total
assets. Each liability and stockholders’
equity item is stated as a percent of the
total liabilities and stockholders’
equity.
15-15

16. 1
Exhibit 5
Comparative
Statement of
Financial
Position—
Vertical
Analysis
15-16

17. 1
Exhibit 5
Comparative
Statement of
Financial
Position—
Vertical
Analysis
Vertical Analysis:
Current assets $550,000
= 48.3%
Total assets $1,139,500
15-17

18. 1
Vertical Analysis of the Statement of
Comprehensive Income
In a vertical analysis of the
statement of comprehensive
income, each item is stated as a
percent of net sales.
15-18

19. 1
Comparative Statement of Comprehensive
Exhibit 6 Income—Vertical Analysis
15-19

20. 1
Comparative Statement of Comprehensive
Exhibit 6 Income—Vertical Analysis
Vertical Analysis:
Selling expenses $191,000
= 12.8%
Net sales $1,498,000
15-20

21. 1
Common-Size Statements
In a common-sized statements, all
items are expressed as a percentage.
Common-sized statements are
useful in comparing the current
period with prior periods, individual
businesses, or one business with
with industry percentages.
15-21

22. 1
Exhibit 7 Common-Sized Statement of Comprehensive
Income
15-22

23. 1
Example Exercise 15-2
Vertical Analysis
Statement of comprehensive income information
for Lee Corporation is provided below.
Sales $100,000
Cost of goods sold 65,000
Gross profit $ 35,000
Prepare a vertical analysis of the statement of
comprehensive income for Lee Corporation.
15-
15-23
23

24. Example Exercise 15-2 (continued)
1
Follow My Example 15-2
Amount Percentage
Sales $100,000 100% ($100,000 ÷ $100,000)
Cost of goods
sold 65,000 65 ($65,000 ÷ $100,000)
Gross profit 35,000 35% ($35,000 ÷ $100,000)
For Practice: PE 15-2A, PE 15-2B
15-
15-24
24

25. 2
Use financial statement
analysis to assess the
solvency of a business.
15-25
15-
25

26. 2
Solvency Analysis
All users of financial statements are
interested in the ability of a company to do
the following:
1. Meet its financial obligations (debts), called
solvency.
2. Earn income, called profitability.
15-26

27. 2
Current Position Analysis
Using measures to assess a business’s
ability to pay its current liabilities is
called current position analysis.
Such analysis is of special interest to
short-term creditors.
15-27

28. 2
Working Capital
The excess of current assets of a business
over its current liabilities is called
working capital. The working capital is
often used in evaluating a company’s
ability to pay current liabilities.
15-28

29. 2
Working Capital = Current Assets – Current Liabilities
2010 2009
Current assets $550,000 $533,000
Less current liabilities –210,000 –243,000
Working capital $340,000$290,000
15-29

30. 2
Current Ratio
The current ratio, sometimes
called the working capital
ratio or bankers’ ratio
measures a company’s ability
to pay its current liabilities.
15-30

31. 2
Current Assets
Current Ratio =
Current Liabilities
2010 2009
Current assets $550,000 $533,000
Current liabilities $210,000 $243,000
Current ratio 2.6 2.2
$550,000 $533,000
$210,000 $243,000
15-31

32. 2
Quick Ratio
A ratio that measures the “instant”
debt-paying ability of a company
is called the quick ratio or acid-
test ratio.
15-32

33. 2
Quick assets are cash
and other current assets
that can be quickly
converted to cash.
2010 2009
Quick assets:
Cash $ 90,500 $ 64,700
Temporary Investments 75,000 60,000
Accounts receivable (net) 115,000 120,000
a. Total quick assets $280,500 $244,700
b. Current liabilities $210,000 $243,000
Quick ratio (a ÷ b) 1.3 1.0
15-33

34. 2
Example Exercise 15-3
Current Position Analysis
The following items are reported on a company’s
statement of financial position:
Cash $300,000
Temporary investments 100,000
Accounts receivable (net) 200,000
Inventory 200,000
Accounts payable 400,000
Determine (a) the current ratio and (b) the quick
ratio.
15-
15-34
34

35. Example Exercise 15-3 (continued)
2
Follow My Example 15-3
a. Current Ratio = Current Assets/Current Liabilities
Current Ratio = ($300,000 + $100,000 + $200,000 +
$200,000) ÷ $400,000
Current Ratio = 2.0
b. Quick Ratio = Quick Assets ÷ Current Liabilities
Quick Ratio = ($300,000 + $100,000 + $200,000) ÷
$400,000
Quick Ratio = 1.5
For Practice: PE 15-3A, PE 15-3B
15-
15-35
35

36. 2
Accounts Receivable Turnover
The relationship between sales and
accounts receivable may be stated as
the accounts receivable turnover.
Collecting accounts receivable as
quickly as possible improves a
company’s solvency.
15-36

37. 2
Net Sales
Accounts Receivable Turnover =
Average Accounts
Receivable
2010 2009
a. Net sales $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
b. Average (Total ÷ 2) $ 117,500 $ 130,000
Accounts receivable turnover
(a ÷ b) 12.7 9.2
15-37

38. 2
Number of Days’ Sales
in Receivables
The number of days’ sales in
receivables is an estimate of the length
of time (in days) the accounts
receivable have been outstanding.
Average Accounts
Number of Days’ = Receivable
Sales in Receivables Average Daily
Sales
Net Sales
15-38 365

39. 2
2010 2009
a. Average accounts receivable
(Total accounts
receivable ÷ 2) $ 117,500 $ 130,000
Net sales $1,498,000 $1,200,000
b. Average daily sales
(Sales ÷ 365) $ 4,104 $ 3,288
Number of days’ sales in
receivables (a ÷ b) 28.6 39.5
15-39

40. 2
Example Exercise 15-4
Accounts Receivable Analysis
A company reports the following:
Net sales $960,000
Average accounts receivable (net) 48,000
Determine (a) the accounts receivable turnover and (b)
the number of days’ sales in receivables. Round to
one decimal place.
15-
15-40
40

41. Example Exercise 15-4 (continued)
2
Follow My Example 15-4
a. Accounts Receivable Turnover = Sales ÷ Average Accounts
Receivable
Accounts Receivable Turnover = $960,000 ÷ $48,000
Accounts Receivable Turnover = 20.0
b. Number of Days’ Sales in Receivables = Average Accounts
Receivable ÷ Average
Daily Sales
Number of Days’ Sales in Receivables = $48,000 ÷ ($960,000/365)
= $48,000 ÷ $2,630
Number of Days’ Sales in Receivables = 18.3 days
15- For Practice: PE 15-4A, PE 15-4B
15-41
41

42. 2
Inventory Turnover
The relationship between the
volume of goods (merchandise)
sold and inventory may be stated
as the inventory turnover. The
purpose of this ratio is to assess
the efficiency of the firm in
managing its inventory.
15-42

43. 2
Cost of Goods Sold
Inventory Turnover =
Average Inventory
2010 2009
a. Cost of goods sold $1,043,000 $ 820,000
Inventories:
Beginning of year $ 283,000
$ 311,000
End of year 264,000
283,000
Total $ 547,000
Inventory turnover (a ÷ b)
$ 594,000 3.8 2.8
b. Average (Total ÷ 2) $ 273,500 $ 297,000
15-43

44. 2
Number of Days’
Sales in Inventory
The number of days’ sales in
inventory is a rough measure
of the length of time it takes
to purchase, sell, and replace
the inventory.
15-44

45. 2
Number of Days’ Average Inventory
=
Sales in Inventory Average Daily Cost of
Goods Sold
Cost of Goods Sold
365
2010 2009
a. Average inventory (Total ÷ 2) $ 273,500 $ 297,000
Cost of goods sold $1,043,000 $ 820,000
b. Average daily cost of goods
sold (COGS ÷ 365 days) $2,858 $2,247
Number of days’ sales in
inventory (a ÷ b) 95.7 132.2
15-45

46. 2
Example Exercise 15-5
Inventory Analysis
A company reports the following:
Cost of goods sold $560,000
Average inventory 112,000
Determine (a) the inventory turnover and (b) the
number of days’ sales in inventory. Round to one
decimal place.
15-
15-46
46

47. Example Exercise 15-5 (continued)
2
Follow My Example 15-5
a. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Inventory Turnover = $560,000 ÷ $112,000
Inventory Turnover = 5.0
b. Number of Days’ Sales in Inventory = Average Inventory ÷ Average
Daily Cost of Goods Sold
Number of Days’ Sales in Inventory = $112,000 ÷ ($560,000/365)
Number of Days’ Sales in Inventory = $112,000 ÷ $1,534
Number of Days’ Sales in Inventory = 73.0 days
For Practice: PE 15-5A, PE 15-5B
15-
15-47
47

48. 2
Ratio of Fixed Assets to
Long-Term Liabilities
The ratio of fixed assets to long-term
liabilities is a solvency measure that
indicates the margin of safety of the
noteholders or bondholders. It also
indicates the ability of the business to
borrow additional funds on a long-
term basis.
15-48

49. 2
Ratio of Fixed Assets to Fixed Assets (net)
=
Long-Term Liabilities Long-Term
Liabilities
2010 2009
a. Fixed assets (net) $444,500 $470,000
b. Non-current liabilities $100,000 $200,000
Ratio of fixed assets to
non-current liabilities (a ÷ b) 4.4 2.4
15-49

50. 2
Ratio of Liabilities to
Stockholders’ Equity
The relationship between the total
claims of the creditors and owners
—the ratio of liabilities to
stockholders’ equity—is a
solvency measure that indicates
the margin of safety for creditors.
15-50

51. 2
Ratio of Liabilities to Total Liabilities
=
Stockholders’ Equity Total Stockholders’
Equity
2010 2009
a. Total liabilities $310,000 $443,000
b. Total stockholders’ equity $829,500 $787,500
Ratio of liabilities to
stockholders’ equity ( a÷ b) 0.4 0.6
15-51

52. 2
Example Exercise 15-6
Long-Term Solvency Analysis
The following information was taken from Acme
Company’s statement of financial position:
Fixed assets (net) $1,400,000
Non-current liabilities 400,000
Total liabilities 560,000
Total stockholders’ equity 1,400,000
Determine the company’s (a) ratio of fixed assets
to non-current liabilities and (b) ratio of liabilities
to total stockholders’ equity.
15-
15-52
52

53. Example Exercise 15-6 (continued)
2
Follow My Example 15-6
a. Ratio of Fixed Assets to Long-Term Liabilities = Fixed Assets ÷ Non-
Current Liabilities
Ratio of Fixed Assets to Long-Term Liabilities = $1,400,000 ÷ $400,000
Ratio of Fixed Assets to Long-Term Liabilities = 3.5
b. Ratio of Liabilities to Total Stockholders’ Equity = Total Liabilities ÷
Total Stockholders’ Equity
Ratio of Liabilities to Total Stockholders’ Equity = $560,000 ÷ $1,400,000
Ratio of Liabilities to Total Stockholders’ Equity = 0.4
For Practice: PE 15-6A, PE 15-6B
15-
15-53
53

54. 2
Number of Times Interest
Charges Are Earned
Corporations in some industries normally
have high ratios of debt to stockholders’
equity. For such corporations, the relative
risk of the debtholders is normally
measured as the number of times interest
charges are earned (during the year),
sometimes called the fixed charge
coverage ratio.
15-54

55. 2
Income Before Income Tax
Number of Times Interest + Interest Expense
=
Charges Are Earned Interest Expense
2010 2009
Income before income tax $162,500 $134,600
a. Add interest expense 6,000 12,000
b. Amount available to pay
interest $168,500 $146,600
Number of times interest
charges earned (b ÷ a) 28.1 12.2
15-55

56. 2
Number of Times Preferred
Dividends Are Earned
The number of times interest charges
are earned can be adapted for use with
dividends on preferred stock.
Number of Times Net Income
Preferred Dividends =
Are Earned Preferred Dividends
15-56

57. Example Exercise 15-7 2
Times Interest Charges Are Earned
A company reports the following:
Income before income tax $250,000
Interest expense 100,000
Determine the number of times interest charges are earned.
Follow My Example 15-7
Number of Times Interest Charges Are Earned = (Income Before Income
Tax + Interest Expense)
÷ Interest Expense
Number of Times Interest Charges Are Earned = ($250,000 + $100,000) ÷
$100,000
Number of Times Interest Charges Are Earned = 3.5
15-57 For Practice: PE 15-7A, PE 15-7B
15-57

58. 3
Use financial statement
analysis to assess the
profitability of a
business.
15-58
15-58

59. 3
Profitability Analysis
Profitability analysis focuses
primarily on the relationship
between operating results and
the resources available to a
business.
15-59

60. 3
Ratio of Net Sales to Assets
The ratio of net sales to assets
is a profitability measure that
shows how effectively a
company utilizes its assets.
15-60

61. 3
Net Sales
Ratio of Net Sales to Assets =
Average Total
Assets
2010 2009
a. Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
b. Average (Total ÷ 2) $1,048,750 $1,031,500
Excludes long-term investments
15-61

62. 3
Net Sales
Ratio of Net Sales to Assets =
Average Total
Assets
2010 2009
a. Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
b. Average (Total ÷ 2) $1,048,750 $1,031,500
Ratio of net sales to assets (a ÷ b) 1.4 1.2
15-62

63. Example Exercise 15-8 3
Net Sales to Assets
A company reports the following:
Net sales $2,250,000
Average total assets 1,500,000
Determine the ratio of net sales to assets.
Follow My Example 15-8
Ratio of Net Sales to Assets = Net Sales ÷ Average Total
Assets
Ratio of Net Sales to Assets = $2,250,000 ÷ $1,500,000
Ratio of Net Sales to Assets = 1.5
For Practice: PE 15-8A, PE 15-8B
15-63
15-63

64. 3
Rate Earned on Total Assets
The rate earned on total assets
measures the profitability of
total assets, without considering
how the assets are financed.
15-64

65. 3
Net Income +
Interest Expense
Rate Earned on Total Assets =
Average Total Assets
2010 2009
Net income $ 91,000 $ 76,500
Plus interest expense 6,000 12,000
a. Total $ 97,000 $ 88,500
Total assets:
Beginning of year $1,230,500 $1,187,500
End of year 1,139,500 1,230,500
Total $2,370,000 $2,418,000
b. Average (Total ÷ 2) $1,185,000 $1,209,000
Rate earned on total
assets (a ÷ b) 8.2% 7.3%
15-65

66. Example Exercise 15-9 3
Rate Earned on Total Assets
A company reports the following statement of comprehensive
income and statement of financial position information for the
current year:
Net income $ 125,000
Interest expense 25,000
Average total assets 2,000,000
Determine the rate earned on total assets.
Follow My Example 15-9
Rate Earned on Total Assets = (Net Income + Interest
Expense) ÷ Average Total Assets
Rate Earned on Total Assets = ($125,000 + 25,000) ÷ $2,000,000
Rate Earned on Total Assets = 7.5%
15-66 For Practice: PE 15-9A, PE 15-9B
15-66

67. 3
Rate Earned on
Stockholders’ Equity
The rate earned on stockholders’
equity measure emphasizes the rate
of income earned on the amount
invested by the stockholders.
15-67

68. 3
Rate Earned on Net Income
=
Stockholders’ Equity Average Total
Stockholders’ Equity
2010 2009
a. Net income $ 91,000 $ 76,500
Stockholders’ equity:
Beginning of year $ 787,500 $ 750,000
End of year 829,500 787,500
Total $1,617,000 $1,537,500
b. Average (Total ÷ 2) $ 808,500 $ 768,750
Rate earned on stockholders’
equity (a ÷ b) 11.3% 10.0%
15-68

69. 3
Leverage
The difference in the rate earned
on stockholders’ equity and the
rate earned on total assets is
called leverage.
15-69

70. 3
Exhibit 8 Effect of Leverage
15-70

71. 3
Rate Earned on Common
Stockholders’ Equity
The rate earned on common
stockholders’ equity focuses
only on the rate of profits
earned on the amount invested
by the common stockholders.
15-71

72. 3
Net Income –
Rate Earned on Common Preferred Dividends
Stockholders’ Equity =
Average Common
Stockholders’ Equity
2010 2009
Net income $ 91,000 $ 76,500
Less preferred dividends 9,000 9,000
a. Remainder—common stock $ 82,000 $ 67,500
Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000
End of year 679,500 637,500
Total $1,317,000 $1,237,500
b. Average (Total ÷ 2) $ 658,500 $ 618,750
Rate earned on common
stockholders’ equity (a ÷ b) 12.5% 10.9%
15-72

73. 3
Example Exercise 15-10
Common Stockholders’ Profitability Analysis
A company reports the following:
Net income $ 125,000
Preferred dividends 5,000
Average stockholders’ equity 1,000,000
Average common stockholders’
equity 800,000
Determine (a) the rate earned on stockholders’ equity
and (b) the rate earned on common stockholders’
equity.
15-
15-73
73

74. Example Exercise 15-10 (continued)
3
Follow My Example 15-10
a. Rate Earned on Stockholders’ Equity = Net Income ÷ Average
Stockholders’ Equity
Rate Earned on Stockholders’ Equity = $125,000 ÷ $1,000,000
Rate Earned on Stockholders’ Equity = 12.5%
b. Rate Earned on Common
Stockholders’ Equity = (Net Income – Preferred Dividends) ÷
Average Common Stockholders’ Equity
Rate Earned on Common
Stockholders’ Equity = ($125,000 – $5,000) ÷ $800,000
Rate Earned on Common
Stockholders’ Equity = 15%
15- For Practice: PE 15-10A, PE 15-10B
15-74
74

75. 3
Earnings per Share on
Common Stock
Earnings per share (EPS) on
common stock measures the share of
profits that are earned by a share of
common stock. GAAP require the
reporting of earnings per share in the
statement of comprehensive income.
15-75

76. 3
Net Income –
Earnings per Share (EPS) Preferred Dividends
on Common Stock =
Shares of Common Stock
Outstanding
2010 2009
Net income $91,000 $76,500
Preferred dividends 9,000 9,000
a. Remainder—identified with
common stock $82,000 $67,500
b. Shares of common stock 50,000 50,000
Earnings per share on common
stock (a ÷ b) $1.64 $1.35
15-76

77. 3
Price-Earnings Ratio
Another profitability measure
quoted by the financial press is
the price-earnings (P/E) ratio
on common stock. The price-
earnings ratio on common stock
measures a company’s future
earnings prospects.
15-77

78. 3
Market Price per Share of
Common Stock
Price-Earnings (P/E) Ratio =
Earnings per Share on
Common Stock
2010 2009
Market price per share of
common stock $41.00 $27.00
Earnings per share on common
stock ÷ 1.64 ÷ 1.35
Price-earnings ratio on
common stock 25 20
15-78

79. 3
Example Exercise 15-11
Earnings per Share and Price-Earnings Ratio
A company reports the following:
Net income $250,000
Preferred dividends $15,000
Shares of common stock
outstanding 20,000
Market price per share of
common stock $35.00
a. Determine the company’s earnings per share on common
stock.
b. Determine the company’s price-earnings ratio. Round to
one decimal place.
15-
15-79
79

80. Example Exercise 15-11 (continued)
3
Follow My Example 15-11
a. Earnings per Share on Common Stock = (Net Income – Preferred
Dividends) ÷ Shares of Common Stock Outstanding
Earnings per Share = ($250,000 – $15,000) ÷ 20,000
Earnings per Share = $11.75
b. Price-Earnings Ratio = Market Price per Share of Common Stock
÷ Earnings per Share on Common Stock
Price-Earnings Ratio = $35.00 ÷ $11.75
Price-Earnings Ratio = 3.0
For Practice: PE 15-11A, PE 15-11B
15-
15-80
80

81. 3
Dividends per Share
Dividends per share can be reported with
earnings per share to indicate the
relationship between dividends and
earnings. Comparing these two per share
amounts measures the extent to which
earnings are being distributed to common
shareholders.
15-81

82. 3
Dividends
Dividends per Share =
Shares of Common Stock
Outstanding
2010 2009
a. Dividends $40,000 $30,000
b. Shares of common stock outstanding 50,000 50,000
Dividends per share of common stock
(a ÷ b) $0.80 $0.60
15-82

83. 3
Dividends and Earnings per
Exhibit 9
Share of Common Stock
15-83

84. 3
Dividend Yield
The dividend yield on common
stock measures the rate of
return to common stockholders
from cash dividends.
15-84

85. 3
Dividends per Share of
Common Stock
Dividend Yield =
Market Price per Share of
Common Stock
2010 2009
a. Dividends per share of
common stock $ 0.80 $ 0.60
b. Market price per share of
common stock 41.00 27.00
Dividend yield on
common stock 2.0% 2.2%
15-85

86. 4
Exhibit 10 Summary of Analytical Measures
15-86 Solvency Measures (continued)

87. 4
Exhibit 10 Summary of Analytical Methods (continued)
15-87 Profitability Measures

88. 4
Describe the contents of
corporate annual
reports
15-88

89. 4
Corporate Annual Reports
In addition to the financial statements and
the accompanying notes, corporate annual
reports usually include the following
sections:
• Management discussion and analysis
• Report on internal control
• Report on fairness of financial statements
15-89

90. 4
Management Discussion and Analysis
The Management Discussion and Analysis
(MD&A) includes an analysis of the results
of operations and discusses management’s
opinion about future performance. It
compares the prior year’s statement of
comprehensive income with the current
year’s. It also contains an analysis of the
firm’s financial condition.
15-90

91. 4
Report on Internal Control
The Sarbanes-Oxley Act of 2002 requires a
report stating management’s responsibility
for establishing and maintaining internal
control. In addition, management’s
assessment of the effectiveness of internal
controls over financial reporting is included
in the report.
15-91

92. 4
Report on Fairness of
Financial Statements
All publicly held corporations are required
to have an independent audit (examination)
of their financial statements. The CPA firm
that conducts the audit renders an opinion
on the fairness of the statements.
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93. Appendix:
Unusual Items on the
Statement of
Comprehensive Income
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94. Unusual Items Affecting the Current
Period’s Statement of Comprehensive
Income
Unusual items affecting the current
period’s statement of comprehensive
income include the following:
• Discontinued operations
• Extraordinary items
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95. Discontinued Operations
A company may discontinue a segment of its
operations by selling or abandoning the
operations. A note accompanying the statement
of comprehensive income should describe the
operations sold including such details as the
date operations were discontinued, the assets
sold, and the effect (if any) on current and
future operations.
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96. Extraordinary Items
An extraordinary item is defined as an
event or transaction with the following
characteristics:
• Unusual in nature
• Infrequent in occurrence
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97. Exhibit 11 Unusual Items in the Statement of
Comprehensive Income
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98. Exhibit 12 Statement of Comprehensive Income with
Earnings per Share
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99. S potlight on IFRS :
IFRS a nd Fina ncia l
S ta te me nt Ana lys is
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100. Impact of IFRS on Financial Statements
• The impacts fall not just on the preparers but
also on the users of financial statements.
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100

101. Difference across Countries
• The bank-oriented continental European countries are
now shifting toward the capital market-oriented
perspective of financial reporting with the
globalization of the financial environments.
• Countries in this area will experience a higher level
of adjustments in financial reporting. For the market-
oriented countries the impact will somewhat be
lower.
• Users of financial statements of the companies need
to make the same adjustments.
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101

102. Quality of Financial Information
• IFRS adoption is perceived to improve the financial
transparency and comparability of financial
statements.
• Research shows that financial statements under the
market-oriented perspective raise the quality of
financial information and benefit investors:
– IFRS improves investor protection, makes capital
markets more accessible to foreign investors, and
improves the comparativeness and
comprehensiveness of financial information.
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102

103. Impact on Financial Ratios
• Differences between IFRS and US GAAP that
contribute to the differences in financial
analysis:
1. Recognition
2. Classification
3. Presentation
4. Timeliness
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