Analysis of a company’s balance sheet can provide insight into the company’s liquidity and solvency—as of the balance sheet date—as well as the economic resources the company controls. Liquidity refers to a company’s ability to meet its short-term financial commitments. Assessments of liquidity focus on a company’s ability to convert assets to cash to pay for…
Long-Term Financial Liabilities Typical long-term financial liabilities include loans (i.e., borrowings from banks) and notes or bonds payable (i.e., fixed-income securities issued to investors). Liabilities such as loans payable and bonds payable are usually reported at amortised cost on the balance sheet. At maturity, the amortised cost of the bond (carrying amount) will be equal…
IFRS defines a financial instrument as a contract that gives rise to a financial asset of one entity, and a financial liability or equity instrument of another entity. Derivatives are financial instruments for which the value is derived based on some underlying factor (Interest rate, exchange rate, commodity price, security price or credit rating) and…
When one company acquires another, the purchase price is allocated to all of the identifiable assets (tangible and intangible) and liabilities acquired, based on fair value. If the purchase price is greater than the fair value of the identifiable assets and liabilities acquired, the excess amount is recognised as an asset, goodwill. The subject of…
Intangible assets are identifiable non-monetary assets without physical substance. An identifiable asset can be acquired on a standalone basis (i.e., can be separated from the entity) or arises from contractual or legal rights and privileges. Common examples include patents, licenses, trademarks, and customer lists. The most common intangible that is not separately identifiable is goodwill, which arises…
1 Which of the following is most likely found in the management commentary? A. Forward-looking disclosures B. Basis of preparation for the financial statements C. Reasonable assurance whether the financial statements as a whole are free from material misstatement Answer Feedback: A Correct because the management commentary, or MD&A, is a good starting place for understanding information…
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…