Financial Statement Analysis: Qualitative Techniques, written by Alan S. Glazer, Professor of Business at Franklin & Marshall College and Glenn L. Stevens, Emeritus Associate Professor of Finance at Franklin & Marshall College, explains how analysts and other users of financial statements employ various qualitative techniques to improve the usefulness of the information contained in those statements. A wide range of recognition, measurement, and disclosure principles used in preparing financial statements are described and illustrated. This work complements other Portfolios in the Accounting Policy and Practice Series that focus on specific accounting subjects. This Portfolio is intended to help these and other types of financial statement users assess qualitatively the information contained in organizations' financial statements and to improve its usefulness.
This Portfolio introduces financial statement analysis and the system of financial reporting used by U.S.-based organizations, and describes five steps typically involved in qualitative analyses.
Financial Statement Analysis: Qualitative Techniques illustrates how those steps are employed to analyze items reported in general-purpose external financial statements — balance sheets, income statements, and statements of cash flows. It describes major groups of users and their typical objectives when analyzing the financial statements and related disclosures of various types of organizations.
It addresses additional information reported in financial statement notes, SEC filings, press releases, and other sources that help users of financial statements better understand organizations and the environments in which they operate. It discusses the financial reporting system used by U.S.-based organizations, the concepts underlying accrual-based financial statements and U.S. generally accepted accounting principles (GAAP), and the limitations of financial statement information.
This Portfolio describes a systematic process for qualitatively analyzing financial statements and identifying accounting-related issues. Financial Statement Analysis: Qualitative Techniques addresses qualitative analyses of related party transactions, executive and board compensation, and corporate governance; and covers risk management and hedging activities, off balance sheet financing, acquisitions and divestitures, consolidation policy, subsequent events, international operations, and auditors' reports and management certifications.
It illustrates how that process can be used to examine organizations' balance sheets, income statements, statements of cash flows, and related disclosures. This Portfolio also provides numerous examples of accounting issues associated with each statement and suggest how financial statement users can adjust reported accounting information before using it in ratio analyses and other quantitative assessments of organizations' financial condition and performance or in forecasting and valuation models.
This Portfolio's worksheets illustrate the types of information commonly used in qualitative financial statement analyses of U.S. public companies, including sample disclosures taken from companies' financial statements, notes to the financial statements, Management's Discussion and Analysis (MD&A), regulatory filings and other sources.
Qualitative financial statement analyses involve examining financial statement information and related disclosures to improve their usefulness in assessing organizations' financial circumstances and performance. Its worksheets include excerpt language from annual reports of numerous public companies illustrating information typically used in qualitative financial statement analyses. The Worksheets also provide a glossary of significant abbreviations and acronyms used in the Portfolio and sample financial statement formats.
Financial Statement Analysis: Qualitative Techniques allows you to benefit from:
This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more.
Detailed Analysis
I. Scope and Purposes of Portfolio
II. Uses of Financial Statement Analysis
Introductory Material
A. Financial Statement Analysts and Their Objectives
B. Techniques and Emphases Depend on Objectives
1. Credit Analysis
2. Equity Analysis
3. Independent Auditors' Analytical Procedures
4. Managers' Analyses
5. Analyses by Governing Bodies
6. Other Analyses of Financial Statements
C. Sources of Information
III. The U.S. Financial Reporting System
A. Objectives of Financial Reporting in the United States
B. Requirements for Financial Reporting by U.S. Public Companies
1. Audited Financial Statements
a. Annual Reporting
b. Other Statutory Reporting Requirements
c. Fair Disclosure Required
2. Generally Accepted Accounting Principles
3. Accrual Accounting Concepts
4. Independent Audits of Annual Financial Statements
5. Sarbanes-Oxley Act of 2002
a. Major Provisions Influencing Financial Reporting
b. Mandated Assessments of Internal Controls
c. Officer Certifications of Annual Reports
d. Other Ramifications
C. Requirements of Financial Reporting by Non-public Organizations
D. Limitations of Financial Statement Information
1. Use of Conventions
a. Reliability
b. Historical Focus
c. Use of Multiple Attributes
d. Stable Monetary Unit
e. Aggregation
f. Accounting Entity
g. Conservatism
h. Summary of Conventions' Effects
2. Compromises Inherent in the Accounting Standard-Setting Process
3. Acceptability of Alternative Accounting Principles and Estimates
IV. Steps in Qualitative Financial Statement Analysis
A. Objectives
B. Five Typical Steps in Qualitative Analysis
C. Step 1: Define the Objectives
D. Step 2: Review Financial Statements and Related Disclosures
1. Increasing Complexity of the Financial Reporting Environment
2. Business and Economic Pressures and Accounting Factors
3. Aggregation and Classification Issues
E. Step 3: Evaluate Significant Accounting Methods, Estimates, and Assumptions
1. Disclosures of Significant Accounting Policies
2. Tone at the Top
3. Internal Controls
F. Step 4: Follow-Up
G. Step 5: Adjust Reported Information
H. Cross References
V. Qualitative Balance Sheet Analysis
A. Introduction and Focus
B. Balance Sheet Reporting
1. Classifications
2. Benefits and Uses of Qualitative Balance Sheet Analyses
3. Adjustments to Reported Balance Sheet Amounts
C. Assets
1. Nature of Assets
a. Characteristics
b. Examples
c. Resources Not Recognized as Assets
2. Analyzing Assets and Related Accounting Policies
a. General Approach
b. Measurement
3. Asset-Related Issues Requiring Follow-Up
4. Adjustments to Reported Asset Amounts
a. Adjustments to Fair Value
b. Other Adjustments
D. Liabilities
1. Nature of Liabilities
c. Obligations Not Recognized as Liabilities
2. Analyzing Liabilities and Related Accounting Policies
c. Scope of Assessments
d. Sources of Information
3. Liability-Related Issues Requiring Follow-Up
4. Adjustments to Reported Liability Amounts
E. Equity
1. Nature of Equity
a. Definition
2. Analyzing Equities and Related Accounting Policies
3. Equity-Related Issues Requiring Follow-Up
4. Adjustments to Reported Equity Amounts
VI. Qualitative Income Statement Analysis
B. Income Statement Reporting
2. Benefits and Uses of Qualitative Income Statement Analyses
3. Limitations on Usefulness of Information
C. Potential for Earnings Management
1. Concept
2. Techniques
3. Limitations
4. Qualitative Assessments
D. Earnings Quality
2. Qualitative Assessments
E. Adjustments to Reported Income Statement Amounts
F. Revenues
1. Nature of Revenues
a. Definition and Measurement
b. Application of Measurement Criteria
c. Classifications of Revenues
2. Analyzing Revenues and Related Accounting Policies
3. Revenue-Related Issues Requiring Follow-Up
a. Overall Approach
b. Specific Questions
c. Red Flags
4. Adjustments to Reported Revenue Amounts
a. Objectives
G. Expenses
1. Nature of Expenses
a. Measurement and Timing
b. Classifications
2. Analyzing Expenses and Related Accounting Policies
a. Sources of Information
3. Expense-Related Issues Requiring Follow-Up
4. Adjustments to Reported Expense Amounts
H. Gains, Losses, and "Other Income" Items
1. Nature of Items
2. Objectives
3. Specific Questions
I. Discontinued Operations and Extraordinary Items
1. Discontinued Operations
2. Extraordinary Gains and Losses
J. Earnings Per Share
K. Pro Forma Earnings
VII. Qualitative Analysis of Statements of Cash Flows
B. Cash Flow Reporting
C. Benefits and Uses of Cash Flow Analyses
1. Analysis of Credit Risk
2. Other Purposes
D. Cash Flows From Operating Activities
1. Definition
2. Alternative Reporting Methods
3. Analytical Uses of Information
a. Perceived Benefit
b. Challenges
4. Specific Questions
E. Cash Flows From Investing Activities
1. Definition and Examples
2. Analytical Uses of Information
F. Cash Flows From Financing Activities
G. Supplemental Cash Related Disclosures
H. Cash Flow Issues Requiring Follow-Up
I. Adjustments to Reported Cash Flow Amounts
1. Concerns
2. Examples of Adjustments
3. Other Pertinent Factors
VIII. Qualitative Analysis of Related Party Transactions, Corporate Governance and Compensation Issues
A. Scope
B. Transactions With Related Parties
C. Corporate Governance
1. Concepts
2. Reforms
a. Statutory and Regulatory Actions
b. Other Responses
3. Analytical Objectives
D. Director and Management Compensation
2. Responses to Concerns
a. Voluntary
b. Regulatory
3. Issues Addressed in Qualitative Analyses
IX. Other Areas for Qualitative Analyses
A. Risk Management and Hedging Activities
1. Risk Assessment
a. Nature of Risks
b. Sources of Information
2. Risk Management
a. Historical Perspectives
b. Objectives
c. Opportunities to Alter Risk Profiles
B. Hedging Activities
1. Accounting Treatment
2. Disclosures
3. Qualitative Assessments
C. Accounting Issues for Particular Industries and Sectors
D. Operating Segments, Major Customers, and Geographical Areas
1. Nature of Information
2. Qualitative Analysis
E. Loan, Bond, and Other Debt Covenants
F. Commitments, Guarantees, Other Contingencies, and Backup Sources of Liquidity
G. Off-Balance-Sheet Financing
1. Omission From Balance Sheets
2. Statutory and Regulatory Responses
H. Acquisitions and Divestitures
1. Objectives
2. Areas of Concern
a. Cash Flows
b. Goodwill
3. Sources of Information
I. Consolidation Policy
1. Accounting Requirements
2. Analytical Adjustments
J. Subsequent Events
2. Recognition and Disclosure
K. International Operations
1. Significance
2. Objectives of Qualitative Assessments
4. Accounting Principles
5. Issues Addressed in Qualitative Analyses
6. Specific Questions
L. Auditors' Reports and Management Certifications
1. Perspectives
a. Auditors' Reports
b. Regulatory Filings
c. Assessments of Internal Control
X. Summary and Conclusions
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 Glossary of Abbreviations and Acronyms
Worksheet 2 Information Sources for Qualitative Analyses
Worksheet 3 Annual Report Information
Worksheet 4 Hierarchy of U.S. Generally Accepted Accounting Principles (GAAP)
Worksheet 5 Accounting Changes
Worksheet 6 Significant Accounting Policies and Estimates
Worksheet 7 Balance Sheets
Worksheet 8 Assets
Worksheet 9 Liabilities
Worksheet 10 Stockholders' Equity
Worksheet 11 Income Statements
Worksheet 12 Revenues
Worksheet 13 Expenses
Worksheet 14 Other Income
Worksheet 15 Restructuring
Worksheet 16 Extraordinary Items
Worksheet 17 EPS Disclosures
Worksheet 18 Non-GAAP Disclosures
Worksheet 19 Statements of Cash Flows
Worksheet 20 Risk Management
Worksheet 21 Industry Sector Disclosures
Worksheet 22 Segments
Worksheet 23 Covenants
Worksheet 24 Commitments
Worksheet 25 Off-Balance-Sheet Financing
Worksheet 26 Acquisitions
Worksheet 27 Consolidated Policy and Equity Method Investments
Worksheet 28 Related Party Transactions
Worksheet 29 Subsequent Events
Worksheet 30 Corporate Governance
Worksheet 31 Compensation
Worksheet 32 International Operations
Worksheet 33 Auditor's Report
Worksheet 34 Management Internal Control and Certification
Bibliography
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Interpretive Releases
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Financial Reporting Release
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Financial Accounting Standards Board:
Statements of Financial Accounting Standards
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Emerging Issues Task Force
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