Page 102 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

READING 18: EVALUATING QUALITY OF FINANCIAL REPORTS
LOS 18.m: Describe sources of information about risk.

• Financial statements MODULE 18.5: EVALUATING BALANCE SHEET QUALITY
• Auditor’s report.
• Notes to financial statements
• Management Discussion and Analysis (MD&A)
• SEC Form ‘NT’. In the United States, SEC form ‘NT’ is filed when a firm is unable to file required reports in a timely manner. Because such an
occurrence is usually due to a breakdown in accounting systems or internal controls, or the discovery of misrepresentation that needs to be
investigated, such filings typically signal problems in reporting quality.
• Financial press.

LOS 19.a: Demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables,
critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management’s discussion of financial results).

The primary purpose of financial statement analysis is to identify potential outcomes, good or bad, that could affect an investment decision.

The analysis focuses on the following:
• Sources of earnings and return on equity.
• Asset base.
• Capital structure.
• Capital allocation decisions.
• Earnings quality and cash flow analysis.
• Market value decomposition.
• Off-balance-sheet financing.
• Anticipating changes in accounting standards.