Assessing the Quality of the Financial Statements Essay

Reading the Financial Statements and Creating a Data File Our experience, and that of our students, is that detailed and thorough reading of the monetary educational activitys yields a great deal of education active the firm. The financial lines, the notes, and managements discussion and analysis provide valuable insights into the business strategies, profitability, and chance of the firm. Many firms explicitly disclose elements of the business that are performing well or poorly, also providing explanations ab knocked out(p) the performance.Many firms explicitly disclose projections of future business activities, such as expected future gross sales growth rates or capital expenditures, which are helpful information for projecting future financial statements. Analysts who do not carefully read the financial statements stand to miss this valuable information. After careful reading, the analyst should enter the financial statement data into a data file. unrivalled initial plec trum in creating a data file is whether to use the accounts and amounts that the firm provides in its Form 10-K or annual report to shareholders or to download and use amounts from various online sources or databases that format the amounts into a standardized guide. single advantage of following the first approach is that you rely on the primary source of the financial statements, not on a secondary source about which you may not know all of the reclassifications and adjustments make to confirm the describe amounts to the standardized template. Another advantage of following the first approach is that the financial statement data will be classified into accounts consistent with the notes to the financial statements, the main source of information for assessing the attribute of the reported amounts. The principal advantages of using amounts in a standardized template are that use of the template can save time and the financial statement amounts are reasonably comparable across f irms.The nigh decision to be made is whether to input the financial statement data into FSAP, a financial statement analysis package that accompanies this text, or to create a new spreadsheet file. The principal advantages of FSAP are that it provides spreadsheets that have enter formulas for the various profitability and risk ratios, it provides a template for preparing forecasted financial statements using the previously reported real amounts as a base, and it inputs the forecasted amounts into several valuation models to arrive at equity values.Assessing the Quality of the Reported Amounts One of the most important steps in financial statement analysis is to assess the quality of the reported amounts and make appropriate adjustments before proceeding to the analysis of profitability and risk. The saying garbage in, garbage out applies with particular importance to financial statements. To assess quality, you must read the financial statements and notes. Material nonrecurring o r ludicrous income items are candidates for adjustment. Significant off-balance-sheet assets or liabilities also are candidates. Some adjustments may be needed to change magnitude the comparability of the financial statement amounts for each of the firms analyzed in the term project.