CHAPTER 1

FINANCIAL STATEMENT ANALYSIS: AN INTRODUCTION

Elaine Henry, CFA

Thomas R. Robinson, CFA

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • describe the roles of financial reporting and financial statement analysis;
  • describe the roles of the key financial statements (statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows) in evaluating a company's performance and financial position;
  • describe the importance of financial statement notes and supplementary information—including disclosures of accounting policies, methods, and estimates—and management's commentary;
  • describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls;
  • identify and describe information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information;
  • describe the steps in the financial statement analysis framework.

1. INTRODUCTION

Financial 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 ...

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