Financial Statement Analysis: Study Session 7
Study Session Materials
New Readings from the 2008 CFA Program
Complete List of CFA Program Readings
Topic Overview
Earnings Quality Issues and Financial Ratio Analysis
The readings in this study session discuss and illustrate the
significance of uncovering a company’s true sustainable cash flow
performance as well as the importance of the analyst’s comparative and/or
economic adjustments to a company’s financial statements prior to
applying comparative ratio analysis to measure financial performance and
risk. The readings also discuss the identification of red flags and
warning signs related to earnings management.
The purpose of a cash flow statement is to provide information about a
company’s cash receipts and cash payments during a financial reporting
period for its operating, investing, and financing activities. In the
first reading, the author shows how the cash flow statement can be
manipulated.
The second and third readings illustrate how an analysis of a company’s financial statements can reveal problems. Analysts should be able to identify red flags and warning signs contained in the financial statements and footnotes that would suggest that the financial reporting quality of a company has been compromised.
Financial ratios may be used to compare the risk and return of a company
with other companies of different sizes. A financial analyst applies
ratio analysis to assess a company’s profitability and asset utilization
efficiencies as well as its liquidity and solvency risks. A significant
hurdle in applying ratio analysis is the difficulty of comparing
companies that use alternative accounting policies and estimates. To
achieve appropriate comparability, the analyst must first identify the
accounting differences and then adjust the financial statement balances
for those differences.
View learning outcome statements (LOS) for reading objectives.
New Readings from the 2008 CFA Program
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"Accounting Shenanigans on the Cash Flow
Statement" Marc A. Siegel, The CPA Journal (New York State Society of Certified Public Accountants, 2006) |
View LOS |
|
"Financial Reporting Quality: Red Flags and
Accounting Warning Signs" Thomas R. Robinson and Paul Munter, Commercial Lending Review (CCH Incorporated, 2004) |
View LOS |
|
"The Lessons We Learn" Pamela P. Peterson and Frank J. Fabozzi, Analysis of Financial Statements (Wiley, 2006) |
View LOS |
Complete List of CFA Program Readings
|
"Accounting Shenanigans on the Cash Flow
Statement" Marc A. Siegel, The CPA Journal (New York State Society of Certified Public Accountants, 2006) |
View LOS | |
|
"Financial Reporting Quality: Red Flags and
Accounting Warning Signs" Thomas R. Robinson and Paul Munter, Commercial Lending Review (CCH Incorporated, 2004) |
View LOS | |
|
"The Lessons We Learn" Pamela P. Peterson and Frank J. Fabozzi, Analysis of Financial Statements (Wiley, 2006) |
View LOS | |
|
“Analysis of Financial Statements: A
Synthesis” Ch. 17, (including Box 17-1), The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS |