Synthesis: Financial Statement Analysis Framework

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 owesBalance Sheet
Company profitabilityIncome Statement
Sources and uses of cashCash Flow Statement
Where significant events are reportedForm 8-K

Step 2: Locate Key Information

Information NeededLocation
Working capitalBalance Sheet (Current Assets - Current Liabilities)
Net worth / Shareholders' equityBalance Sheet
Net income / ProfitabilityIncome Statement (bottom line)
Cash position changeCash Flow Statement
Management changesForm 8-K
Audited annual financialsForm 10-K
Unaudited quarterly financialsForm 10-Q

Key Formulas

Balance Sheet Equation:

Assets=Liabilities+Owners’ Equity\text{Assets} = \text{Liabilities} + \text{Owners' Equity}

Working Capital:

Working Capital=Current Assets−Current Liabilities\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}

Quick Reference: SEC Forms

FormFiled ByTimingKey Content
10-KPublic companiesAnnuallyAudited financials
10-QPublic companiesQuarterlyUnaudited financials
8-KPublic companies4 daysMaterial events
DEF 14APublic companiesBefore annual meetingProxy statement (exec comp, board nominees)

Quick Reference: Auditor Opinions

OpinionMeaningSeverity
UnqualifiedClean; GAAP compliantBest (no issues)
QualifiedMaterial but NOT pervasive issueModerate concern
AdverseMaterial AND pervasive; NOT fairly presentedMost severe
DisclaimerUnable to form opinionInsufficient info

Quick Reference: Cash vs. Accrual

MethodRevenue Recognized When...Required For...
CashCash is receivedSmaller businesses
AccrualRevenue is earnedPublic companies (GAAP)

The Critical Questions on the Exam

When you see a financial reporting question, ask yourself:

  1. Which statement contains this information? (Balance sheet for position, income statement for profitability, cash flow for liquidity)
  2. What time frame? (Balance sheet = point in time, others = period of time)
  3. How does this action affect the equation? (Assets = Liabilities + Equity must always balance)
  4. Is this audited or unaudited? (10-K = audited annually, 10-Q = unaudited quarterly)
  5. Cash or accrual? (When is revenue recognized? Under GAAP/accrual = when earned)