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Exam: June 2015 Level 1 > Study Session 7. Financial Reporting and Analysis: An Introduction > Reading 22. Financial Statement Analysis: An Introduction

Learning Outcome Statements

22c. describe the importance of financial statement notes and supplementary information - including disclosures of accounting policies, methods and estimates - and management's commentary;

22.e. identify and describe information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information;

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Subject 3. Other financial information sources

Financial Notes and Supplementary Schedules

Financial footnotes are an integral part of the financial statements. They provide information about the accounting methods, assumptions and estimates used by management to develop the data reported in the financial statements. They provide additional disclosure in such areas as fixed assets, inventory methods, income taxes, pensions, debt, contingencies such as lawsuits, and sales to related parties, etc. They are designed to allow users to improve assessments of the amounts, timing, and uncertainty of the estimates reported in the financial statements.

Supplementary Schedules: In some cases additional information about assets and liabilities of a company is provided as supplementary data outside the financial statements. Examples include oil and gas reserve reported by oil and gas companies, the impact of changing prices, sales revenue, operating income and other information for major business segments. Some of the supplementary data are unaudited.

Management Discussion and Analysis (MD&A)

This requires management to discuss specific issues on the financial statements, and to assess the company's current financial condition, liquidity, and its planned capital expenditure for the next year. An analyst should look for specific concise disclosure as well as consistency with footnote disclosure.

Note that the MD&A section is not audited and it is for public companies only.

Auditor's Reports

See next subject for details.

Other Sources of Information

  • Interim reports. Publicly held companies must file form 10-Q (interim report) on a quarterly basis. It is far less detailed than annual financial statements, as it contains unaudited basic financial statements, unaudited footnotes to financial statements, and management discussion and analysis.

  • Proxy statements. An analyst should look for litigation, executive compensation, and related-party transactions, known as proxy statements. Proxy statements should be considered as an integral part of the financial report, and they may contain special compensation "perks" for officers and directors, and also lawsuits and other contingent obligations facing the company.

  • Companies' websites, press releases and conference calls.

User Comments 7

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  1. roydain: Are Financial notes audited? Are Proxy Statements audited?
  2. quean2008: 1. Interim report is in condense form, not subject to full audit and less date than anaual report
    2. Accounting method and assumption can be found on footnote while others in MD&A or supplementary schedule
  3. rethan: Is this statement correct?
    "10-Q (interim report) on a quarterly basis. It is far less detailed than annual financial statements, as it contains unaudited basic financial statements"
    I thought 10-Qs had to be audited as they are filed with the SEC
  4. JoshL1: No, 10-Q's are not audited. They are "reviewed" by the auditors, which is nowhere near as robust as the audit of the 10-K (the annual year-end financial statements).
  5. MRSLETS: What is 10-Q and 10-K?
  6. reganbaha: 10-Q (interim report)
    10-K (the annual year-end financial statements).
  7. thekobe: mrslets, take a brief look at the edgar online website so you can take a look to a 10q and a 10k, so you can realize the differences

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