Management discussion and analysis and note disclosures to the financial statements are included in
Notes to the financial statements disclose the detailed assumptions made by accountants when preparing a company’s: income statement, balance sheet, statement of changes of financial position or statement of retained earnings. The notes are essential to fully understanding these documents. Show
Usually, the first notes in the series explain the “basis for accounting”—if cash or accrual rules were used to prepare the documents—and the methods used to report amortization/depreciation expenses. The rest of the notes explain, in greater detail, how the figures have been calculated. This gives the reader the information needed to do deeper analysis. More about the notes to the financial statementsBelow is an illustrative example of the first page of a set of notes: ABC Co. Notes to financial statements Year ended March 31, 2012ABC Co. is incorporated under the Business Corporations Act of the Province of Ontario. The company’s principal business activity is to manufacture and distribute widgets to Canadians. Significant accounting policies Basis of accounting
InventoriesInventories are valued at the lower of cost and net realizable value. EquipmentEquipment is stated at acquisition cost. Amortization is provided at the following annual rates and methods:
2022 Curriculum CFA Program Level I Financial Reporting and Analysis IntroductionFinancial analysis is the process of examining a company’s performance in the context of its industry and economic environment in order to arrive at a decision or recommendation. Often, the decisions and recommendations addressed by financial analysts pertain to providing capital to companies—specifically, whether to invest in the company’s debt or equity securities and at what price. An investor in debt securities is concerned about the company’s ability to pay interest and to repay the principal lent. An investor in equity securities is an owner with a residual interest in the company and is concerned about the company’s ability to pay dividends and the likelihood that its share price will increase. Overall, a central focus of financial analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of that capital, to profitably grow its operations, and to generate enough cash to meet obligations and pursue opportunities. Fundamental financial analysis starts with the information found in a company’s financial reports. These financial reports include audited financial statements, additional disclosures required by regulatory authorities, and any accompanying (unaudited) commentary by management. Basic financial statement analysis—as presented in this reading—provides a foundation that enables the analyst to better understand other information gathered from research beyond the financial reports. This reading is organized as follows: Section 2 discusses the scope of financial statement analysis. Section 3 describes the sources of information used in financial statement analysis, including the primary financial statements (statement of financial position or balance sheet, statement of comprehensive income, statement of changes in equity, and cash flow statement). Section 4 provides a framework for guiding the financial statement analysis process. A summary of the key points conclude the reading. Learning OutcomesThe member should be able to:
SummaryThe information presented in financial and other reports, including the financial statements, notes, and management’s commentary, help the financial analyst to assess a company’s performance and financial position. An analyst may be called on to perform a financial analysis for a variety of reasons, including the valuation of equity securities, the assessment of credit risk, the performance of due diligence on an acquisition, and the evaluation of a subsidiary’s performance relative to other business units. Major considerations in both equity analysis and credit analysis are evaluating a company’s financial position, its ability to generate profits and cash flow, and its potential to generate future growth in profits and cash flow. This reading has presented an overview of financial statement analysis. Among the major points covered are the following:
What does the management discussion and analysis include?Management discussion and analysis (MD&A) is a section within a company's annual report or quarterly filing where executives analyze the company's performance. The section can also include a discussion of compliance, risks, and future plans, such as goals and new projects.
What should be disclosed in notes to the financial statements?Notes to the financial statements disclose the detailed assumptions made by accountants when preparing a company's: income statement, balance sheet, statement of changes of financial position or statement of retained earnings. The notes are essential to fully understanding these documents.
What information is provided in the management's Discussion and Analysis section of the financial statements?What is the MD&A Section of Financial Reporting? The Management Discussions and Analysis (MD&A) is a section of the annual report or SEC filing 10-K that provides an overview of how the company performed in the prior period, its current financial condition, and management's future projections.
Where would you find management's discussion and analysis report?Management discussion and analysis, or MD&A, is a section that can be found in the annual report of a company. The MD&A section provides key information regarding how a company is performing financially. The information can also be found in the SEC Form 10-K.
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