Common-Size Analysis of the Income Statement Common-size analysis of the income statement can be performed by stating each line item on the income statement as a percentage of revenue. Common-size statements facilitate comparison across time periods (time series analysis) and across companies (cross-sectional analysis) because the standardisation of each line item removes the effect of…
IFRS require the presentation of EPS on the face of the income statement for net profit or loss (net income) and profit or loss (income) from continuing operations and similar presentation is required under US GAAP. Simple versus Complex Capital Structure Ordinary shares are those equity shares that are subordinate to all other types of…
Both IFRS and US GAAP specify that the results of discontinued operations should be reported separately from continuing operations. Other items that may be reported separately on a company’s income statement, such as unusual items, items that occur infrequently, effects due to accounting changes, and non-operating income, require the analyst to make some judgments. Unusual…
General Principles The three common expense recognition models are as follows: the matching principle, expensing as incurred, and capitalisation with subsequent depreciation or amortisation. Period costs, expenditures that less directly match revenues, are generally expensed as incurred (i.e., either when the company makes the expenditure in cash or incurs the liability to pay). Costs associated…
General Principle A fundamental principle of accrual accounting is that revenue is recognised (reported on the income statement) when it is earned, so the company’s financial records reflect revenue from the sale when the risk and reward of ownership is transferred; this is often when the company delivers the goods or services. If the delivery…
In addition to regulated information from issuers such as the financial statements and notes in filings, analysts use a variety of other information sources for financial analysis, which we group by origin: issuers, public third-party, proprietary third-party, and proprietary primary research.
Monitoring Developments in Financial Reporting Standards Analysts need to monitor ongoing developments in financial reporting and assess their implications for security analysis and valuation. The need to monitor developments in financial reporting standards does not mean that analysts should be accountants. An accountant monitors these developments from a preparer’s perspective; an analyst needs to monitor…
IFRS (International Financial Reporting Standards) US GAAP (Generally Accepted Accounting Principles) International Organisation of Securities Commissions IOSCO’s comprehensive set of Objectives and Principles of Securities Regulation is updated as required and is recognised as an international benchmark for all markets. The principles of securities regulation are based upon three core objectives: IOSCO’s principles are grouped into 10…
The role of financial statement analysis is to use financial reports prepared by companies, combined with other information, to evaluate the past, current, and potential performance and financial position of a company for the purpose of making investment, credit, and other economic decisions. In evaluating financial reports, analysts typically have a specific economic decision in…
Financial Statement Analysis Framework Phase Sources of Information Output Articulate the purpose and context of the analysis. The nature of the analyst’s function, such as evaluating an equity or debt investment or issuing a credit rating.Communication with client or supervisor on specific needs and concerns.Institutional guidelines related to developing specific work product. Statement of the…