Series 65 › Foundation › Financial Reporting › Synthesis You have now covered the three financial statements, auditor opinions, SEC reporting requirements, and accounting fundamentals. Here is a framework for approaching financial reporting questions on the exam.
Step 1: Identify the Statement Type
If you need to find... Look at the... What the company owns and owes Balance Sheet Company profitability Income Statement Sources and uses of cash Statement of Cash Flows Where significant events are reported Form 8-K
Information Needed Location Working capital Balance Sheet (Current Assets - Current Liabilities) Net worth / Shareholders' equity Balance Sheet Net income / Profitability Income Statement (bottom line) Cash position change Statement of Cash Flows Management changes Form 8-K Audited annual financials Form 10-K Unaudited quarterly financials Form 10-Q
Balance Sheet Equation:
Assets = Liabilities + Owners’ Equity \text{Assets} = \text{Liabilities} + \text{Owners' Equity} Assets = Liabilities + Owners’ Equity Working Capital:
Working Capital = Current Assets − Current Liabilities \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} Working Capital = Current Assets − Current Liabilities Form Filed By Timing Key Content 10-K Public companies Annually Audited financials 10-Q Public companies Quarterly Unaudited financials 8-K Public companies 4 days Material events DEF 14A Public companies Before annual meeting Proxy statement (exec comp, board nominees)
Quick Reference: Auditor Opinions
Opinion Meaning Severity Unqualified Clean; GAAP compliant Best (no issues) Qualified Material but NOT pervasive issue Moderate concern Adverse Material AND pervasive; NOT fairly presented Most severe Disclaimer Unable to form opinion Insufficient info
Quick Reference: Cash vs. Accrual
Method Revenue Recognized When... Required For... Cash Cash is received Smaller businesses Accrual Revenue is earned Public companies (GAAP)
The Critical Questions on the Exam
When you see a financial reporting question, ask yourself:
Which statement contains this information? (Balance sheet for position, income statement for profitability, cash flow for liquidity)What time frame? (Balance sheet = point in time, others = period of time)How does this action affect the equation? (Assets = Liabilities + Equity must always balance)Is this audited or unaudited? (10-K = audited annually, 10-Q = unaudited quarterly)Cash or accrual? (When is revenue recognized? Under GAAP/accrual = when earned)