F-401
Financial Statement Analysis & Valuation
Financial Statements
• Financial statements are reports or statements that provide the details of the entity’s financial
information, including assets, liabilities, equities, incomes and expenses, shareholders’
contributions, cash flow, and other related information during the period of time.
• These statements normally require an annual audit by independent auditors and are presented
along with other information in the entity’s annual report.
• Based on IAS 1, there are five types of Financial Statements that the entity must prepare and
present if those statements are prepared by using IFRS, and the same as if they are using US GAAP.
• In general, there are five types of financial statements the income statement, statement of
financial position, statement of change in equity, cash flow statement, and the Noted (disclosure)
to financial statements. that is prepared by an entity monthly, quarterly, annually, or for the
period required by management.
Financial Statements
1) Income Statement (The statement of financial performance ):
• The income statement is one of the financial statements of an entity that reports three main financial
information of an entity for a specific period. This information included revenues, expenses, and profit or loss
for the period.
• The income statement is sometimes called the statement of financial performance because this statement lets
the users assess and measure the financial performance of an entity from period to period of a similar entity,
competitors, or the entity itself.
• If the users want to see how much the entity makes sales, how much the expenses are incurred, and how much
the profit or loss is during the period, then the income statement is the statement that the user should be
looking for.
Financial Statements
2) Balance Sheet(statement of financial position):
• It shows the balance of assets, liabilities, and equity at the end of the period. The balance sheet is
sometimes called the statement of financial position since it shows the values of the entity’s net
worth. You can find an entity’s net worth by removing liabilities from total assets.
• It is different from the income statement since the balance sheet reports the account’s balance at the
reporting date. In contrast, the income statement reports the account’s transactions during the
reporting period.
• If the user of financial statements wants to know the entity’s financial position, then the balance
sheet is the statement the user should be looking for.
Financial Statements
3) Statement of Change in Equity:
• A statement of change inequity is one financial statement that shows the shareholder contribution
and movement in equity. And equity balance at the end of the accounting period.
• Information that shows these statements includes the classification of share capital, total share
capital, retained earnings, dividend payment, and other related state reserves. The statement of
change of equity results from the income statement and balance sheet.
• If the income statement and balance sheet are correctly prepared, the statement of change in equity
would be corrected too.
4) Statement of Cash Flow:
• The cash flow statement is one of the financial statements that show the movement (cash inflow
and outflow) of the entity’s cash during the period. This statement helps users understand how is
the cash movement in the entity.
• There are three sections in this statement. They are cash flow from the operation, cash flow from
investing, and cash flow from financing activities.
Financial Statements
5) Noted to Financial Statements:
This is the mandatory requirement by IFRS that
the entity has to disclose all information that
matters to financial statements and help users
better understand.
Demand for Financial Statement Information
❑ Shareholders
❑ Managers
❑ Employees
❑ Creditors
❑ Government
❑ Consumers
❑ Other Parties
Demand for Financial Statement Information
❑ Shareholders
➢ Holding strategic position or not
➢ Regular and timely evaluation
➢ Corporate governance, agency cost, minority interest etc.
➢ pre-investment and post-investment decision
❑ Managers
➢ performance based evaluation and bonus
➢ merger and acquisition decision
➢ contract with different parties
Demand for Financial Statement Information
❑ Employees
➢ profitability and solvency of firm
➢ future benefit like Provident fund or gratuity fund
➢ job security
❑ Creditors
➢ liquidity, leverage, profitability of the firm
➢ short term and long-term loan decision
➢ decisions like amount of loan, interest rate, terms of loan, security consideration
❑ Government
➢ Revenue collection ( Tax, VAT etc.)
➢ Govt. regulated companies
➢ Market observation
Demand for Financial Statement Information
❑ Consumers
➢ warranties, guarantees or other benefits
➢ customer trust
❑ Other Parties
➢ Academics, environmental protection organizations, other pressure groups.
Importance of Financial Statement Information
▪ Reduction of asymmetric information
▪ Better decision making
▪ Economic influence
