APSN CFA 2013 Level 1 Study Session Financial Statement Reporting and Analysis

by Sam Gottlieb

This is another Study Session containing important topics in financial statement analysis. The first Reading looks at tax and the differences between accounting for tax in financial statements and in tax reports. The differences give rise to deferred tax assets and liabilities when tax is ‘overpaid’ or ‘underpaid’ according to the financial statements. In addition to mastering the different terminology used in the reporting systems, candidates need to understand the details of how deferred tax items are created and recorded.The last two Readings tackle analysis of liabilities. First we look at financial liabilities where there is debt as a result of a financing decision. Generally debt is recorded on the balance sheet as the present value of future cash flows (interest and principal repayment) that the company will need to pay on the debt. The Reading focuses on the impact on the financial statements of issuing bonds when they are issued at a premium or discount to par value. Next we look at contractual liabilities such as leases and other forms of off-balance-sheet debt. Candidates need to differentiate between the effect of companies using operating leases (which are an expense and not recorded on the balance sheet) and using capital leases (where the accounting treatment is similar to the company actually owning the asset).The readings in this study session discuss financial analysis techniques, financial statement analysis applications, and the international convergence of accounting standards. The first reading presents the most frequently used tools and techniques used to evaluate companies, including common size analysis, cross-sectional analysis, trend analysis, and ratio analysis. The second reading then shows the application of financial analysis techniques to major analyst tasks including the evaluation of past and future financial performance, credit risk, and the screening of potential equity investments. The reading also discusses analyst adjustments to reported financials. Such adjustments are often needed to put companies’ reported results on a comparable basis.This study session concludes with a reading on convergence of international and U.S. accounting standards. Although there has been much progress in harmonizing accounting standards globally, as this reading discusses, there are still significant variations between generally accepted accounting principles from one country to another.

22 pages, Kindle Edition

First published October 2, 2012