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FMA101 TOPIC 2 Financial Statements and Analysis with Assignment Answers
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After completing this topic, you should be able to:
- Explain, analyse and discuss the purpose, functions and content of the different financial statements and the shareholders’ report.
- Identify the different users of financial statements and explain the value that the content of the financial statements has for the different user groups.
- Identify and explain the objectives and functions of the different types of ratio comparisons performed by business entities and the different categories of financial ratios and other financial analysis instruments used by business entities when conducting a financial analysis.
- Explain where to be cautious when using financial analysis.
- Use relevant financial ratios and related analysis instruments to calculate, analyse, interpret, explain or discuss a business entity’s financial status and performance.
Before continuing with this topic, please read the following:
- Gitman et al. (2015: Chapter 3)
Please make sure that you also read this study guide carefully as it contains additional information that is not in the prescribed textbook.
THE SHAREHOLDERS’ REPORT
The key concepts that you must focus on are:
- the shareholders’ report
- the purpose of annual general shareholders’ meetings
- International Accounting Standard (IAS) 1
- the four financial statements used by business entities, their purposes, functions and
- the different groups of users of financial statements and the benefits they gain from these financial statements
- different types of ratio comparisons performed by business entities
- the caution associated with financial ratio analysis
Read this section to gain an understanding of the purpose and content of a shareholders’ report. Shareholders’ reports are prepared at least once a year and presented to the shareholders of public and private companies. This report is presented at the annual general shareholders’ meeting that usually takes place after the financial year end of an organisation.
The Companies Act 71 of 2008 requires public companies to publish extracts of its shareholders’ report and financial statements in the daily news media. When reading newspapers such as Business Day or Financial Mail, you will notice such publications on a regular basis.
You need to be able to explain the role that the International Accounting Standard 1 plays in the preparation and presentation of financial statements.
You must be able to identify and distinguish between the four different financial statements discussed in chapter 3 of the prescribed textbook. You must further be able to explain or discuss the purpose and functions of each of the different financial statements as well as the notes to the financial statements.
You must also understand the relationships that exist between these financial statements and how they jointly and severally present the financial position and performance of a business entity.
It is very important that you understand the composition, format and content of each financial statement very well and can identify, explain or discuss the purpose and meaning of each element contained in each of these financial statements. A thorough understanding of each of the items included in these statements, their origins and meaning are expected.
The financial statements form the basis for financial analysis and decision-making. You will not be able to perform any meaningful financial analysis unless you understand financial statements in their entirety very well.
You need to be able to explain different types of ratio comparison techniques such as cross-sectional analysis, time-series analysis and combined analysis used by business entities to analyse their financial performance.
You need to be familiar with the different stakeholder groups which have vested interests in the financial performance of business entities. You need to be able to explain what type of financial information each group requires as well as their reasons for needing such information.
You also need to understand the caution and risks associated with the use of financial analysis for decision-making.
USING FINANCIAL RATIOS
The key concepts that you must focus on are:
- the different categories of financial ratios and what each category represents, measures and analyses in terms of financial performance.
- the individual financial ratios, the information used to calculate each ratio and how to interpret the results for a financial ratio in terms of the elements of its composition.
- common-size statements of comprehensive income and financial position, and how to prepare such statements, analyse them and interpret and discuss their results.
You must make sure that you have a very thorough understanding of:
- the purpose of every category of financial ratios presented in chapter 3 of the prescribed textbook.
- every individual financial ratio and other forms of financial analysis presented in each of the financial ratio groups discussed in chapter 3 of the prescribed textbook.
- the formulas used to calculate the different financial ratios or other analysis methods.
- the outcomes of calculated financial ratios and what they mean in a business context – you must be able to explain or discuss the results of all ratio calculations and how they reflect financial performance.
You must be able to:
- identify and extract relevant financial information from the appropriate financial statements of an organisation.
- select the most appropriate financial ratios to calculate for a given situation.
- perform the correct calculations using the correct formulas.
- compare the financial performance of an organisation with those of other organisations in the same industry (cross-sectional analysis).
- interpret the results of such calculations in the context of the business being analysed.
- draw conclusions or make recommendations based on the findings.
Throughout the chapter, comprehensive examples are used, demonstrated and explained. You must study each of these examples thoroughly to make sure that you understand how every ratio or alternative analysis instrument is calculated. You must also be able to interpret and explain the outcomes of such calculations.
Section 3.8 “A complete ratio analysis” is excluded from the prescribed learning and will not be assessed in any assignment or examination.
ADDITIONAL SOURCES TO ACCESS
To gain further understanding of the use of financial ratio analysis, you can access the following sources:
- https://corporatefinanceinstitute.com/resources/knowledge/finance/types- of-financial-analysis/, accessed 25 February 2020.
- https://www.datapine.com/blog/financial-reporting-and-analysis/, accessed 25 February 2020.
- https://www.cleverism.com/financial-statement-analysis-introduction/, accessed 25 February 2020.
At the end of this chapter, there is a series of different self-test problems, warm- up exercises, problems and a more comprehensive case study. You should attempt to answer these questions, perform the calculations and use them to practise and re-enforce your learning and understanding. You may submit any of your answers to the lecturer for assessment and feedback.
SBS also shares copies of previous exam papers with you during the semester. The questions in these exam papers are very good examples of what you are expected to know and be able to do having studied and mastered the content of chapter 3 of the prescribed textbook and having followed the guidance provided in this topic.