Reading 28: Integration of Financial Statement Analysis Techn class, framework, statements, particular

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Session 7: Financial Reporting and Analysis: Earnings Quality Issues and Financial Ratio Analysis
Reading 28: Integration of Financial Statement Analysis Techniques

LOS a: Demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management's discussion of financial results).

 

 

Wanda Brunner, CFA, is analyzing Straight Elements, Inc., (SE). SE is a discount manufacturer of parts and supplies for the railroad industry. She has followed her firm’s suggested financial analysis framework, and has assembled output from processing data. When applying the financial analysis framework, which of the following is the best example of output from processing data?

A) Audited financial statements.

B) Common-size financial statements.

C) A written list of questions to be answered by the analysis.

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Common-size financial statements are created in the data processing step of the framework for financial analysis. Audited financial statements would be obtained during the “collect input” phase of the financial analysis framework. Creating a written list of questions to be answered by the analysis is part of the “define the purpose” phase of the financial analysis framework.

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An analyst is developing a framework for financial statement analysis for his firm. This framework is most likely to include:

A) Determine the allocation of firm fees, interpret processed data, and communicate conclusions.

B) Define the purpose of the analysis, process input data, and follow up.

C) Maintain integrity of capital markets, perform duties to clients and employers, and avoid conflicts of interest.

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Proper analysis framework should include:

1. Define the purpose of the analysis.
2. Collect input data.
3. Process input data.
4. Interpret processed data.
5. Develop and communicate conclusions.
6. Follow up.

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An analyst is analyzing a discount manufacturer of parts and supplies. She has followed her firm’s suggested financial analysis framework and has communicated with company suppliers, customers, and competitors. This is an input that occurs while:

A) processing data.

B) collecting data.

C) establishing the objective of the analysis.

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Communication with management, suppliers, customers, and competitors is an input during the data collection step. Processing data is the third phase of the financial analysis framework. Establishing the objective of the analysis is part of the “define the purpose” phase of the financial analysis framework.

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An analyst is analyzing TRK Construction (TRK) for possible recommendation to his firm’s clients. He wants to use TRK’s financial statements to answer such questions as “Is TRK suitable for firm clients?”, “Is TRK priced properly relative to peers?”, “What is TRK’s earnings quality?” The analyst is most likely to begin with:

A) a DuPont analysis.

B) a review of his firm’s framework for analysis of financial statements.

C) analysts adjustments to the financial statements.

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Analysis of financial statements should be performed in the context of an overall framework for the analysis of financial statements. Specific adjustments or analysis of specific ratios is a secondary concern.

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An analyst is developing a framework for financial statement analysis for his firm. The primary goal of financial statement analysis is to:

A) justify trading decisions for purposes of the Statement of Code and Standards.

B) facilitate an economic decision.

C) document portfolio changes for purposes of the Prudent Investor Rule.

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The primary goal of financial statement analysis is to facilitate an economic decision. For example, the firm may use financial analysis to decide whether to recommend a stock to its clients. Documentation and justification of trading decisions may be aided by financial statement analysis, but these are not the primary purposes.