Prof. Dr. Martin Užík

Financial Statement Analysis

Source

Aswath Damodaran

Gregory Mostyn, CPA: Essentials of Financial Statement Analysis

…

Financial Statement Analysis

- The balance sheet: summarizes what a firm owns and owes at a point

in time.

- The income statement: reports on how much a firm earned in the period

of analysis

- The statement of cash flows: reports on cash inflows and outflows to the

firm during the period of analysis

Financial Statement Analysis

Assets Liabilities

Fixed Assets

Current Assets

Financial Investments

Intangible Assets

Current Liabilities

Debt

Other Liabilities

Equity

- A financial statement should reflect true and fair view of the business

affairs of the organization.

The Financial Balance Sheet

The Income Statement

The Statement of Cash Flows

Standards

• IFRS (International Financial Reporting Standards)

• principles-based standards, interpretations and the framework in 1989

adopted by the International Accounting Standards Board (IASB)

• International Financial Reporting Standards (IFRS)—standards issued after 2001

• International Accounting Standards (IAS)—standards issued before 2001

• Standing Interpretations Committee (SIC)—issued before 2001

• Conceptual Framework for the Preparation and Presentation of Financial

Statements (2010)

• International Accounting Standards (IAS); IAS were issued between 1973 and

2001 by the Board of the International Accounting Standards Committee

(IASC)

Elements of financial statement (IAS 1 article 10)

• Asset: An asset is a resource controlled by the enterprise as a result of past

events from which future economic benefits are expected to flow to the

enterprise.

• Liability: A liability is a present obligation of the enterprise arising from the past

events, the settlement of which is expected to result in an outflow from the

enterprise' resources, i.e., assets.

• Equity: Equity is the residual interest in the assets of the enterprise after

deducting all the liabilities under the Historical Cost Accounting model. Equity

is also known as owner's equity. Under the units of constant purchasing power

model equity is the constant real value of shareholders´ equity. The financial

performance of an enterprise is primarily provided in the Statement of

Comprehensive Income (income statement or profit and loss account).

Elements of income statement (IAS 1 article 10)

• Revenues: increases in economic benefit during an accounting period in the

form of inflows or enhancements of assets, or decrease of liabilities that result

in increases in equity. However, it does not include the contributions made by

the equity participants, i.e., proprietor, partners and shareholders.

• Expenses: decreases in economic benefits during an accounting period in the

form of outflows, or depletions of assets or incurrences of liabilities that result

in decreases in equity.

Standards

• HGB (Handelsgesetzbuch)

• the German code of commercial and company law

Standards

• US-GAAP (United States Generally Accepted Accounting Principles)

• In the United States, GAAP is a set of rules and standards that guide

accountants as to when and how to properly record transactions and

how to prepare proper financial statements. GAAP is not like

unchanging laws of physics. GAAP is designed to meet the needs of

society. GAAP is always evolving as the economic environment

changes. Also, GAAP only refers to rules of accounting in the United

States.

Financial Statement Analysis

• Horizontal analysis

- is a comparison of financial statement information over a period of time. Both

dollar amounts and percentage amounts are evaluated to identify changes

and trends from the base year. Watching trends over an extended time period

is an extremely valuable analytical procedure.

• Vertical analysis

- A method of financial statement analysis in which the categories of accounts

(assets, liabilities and equities) in a balance sheet is represented as a

proportion of the total account. The main advantages of vertical analysis is

that the balance sheets of businesses of all sizes can easily be compared. It

also makes it easy to see relative annual changes within one business.