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Review questions

  • Official documents including include prospectus, annual reports, quarterly reports, and management presentations
  • The firm’s internet home-page
  • Press-releases and stock exchange announcement
  • Analyst report
  • Market reports prepared by industry expert firms and consultancy firms
  • News/articles in the press or magazines

The annual report is considered the most reliable report as it is audited by an independent auditor and must be in compliance with accounting standards. Prospectus and quarterly reports are also considered reliable, since they are issued by the board and in most cases are reviewed (but not fully audited) by an auditor. These documents have certain requirements set by the stock exchange, national law and accounting standards.

Presentations, stock exchange announcements and press-releases are somewhat less reliable, mainly due to the risk of unbalanced, incomplete or biased information.

Analyst reports and reports by professional external experts and consulting firms might be highly valuable because they tend to be more objective and often are peer reviewed.

Articles published in the press or in magazines vary in quality, insight, reliability and objectivity and are often regarded as the least reliable source of information.

  • income statement
  • The statement of financial position (or the balance sheet)
  • The cash flow statement
  • Statement of changes in equity
  • Notes, comprising a summary of significant accounting policies, accounting estimates and other explanatory information.
  • Revenue
  • Operating expenses
  • Financial income and expenses
  • Taxes
  • Net earnings

Current assets are those that satisfy one or more of the following criteria:

  • It is expected to be realised in, or is intended for sale or consumption in, the entity’s (firm’s) normal operating cycle
  • It is held primarily for the purpose of being traded
  • It is expected to be realised within twelve months after the reporting date
  • It is cash or a cash equivalent.

Assets that do not meet any of these criteria shall be classified as non-current.

Current liabilities are those that satisfy any of the following criteria:

  • It is expected to be settled in the entity’s (firm’s) normal operation cycle
  • It is held primarily for the purpose of being traded
  • It is due to be settled within twelve months after the reporting date
  • The agency does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date.

All other liabilities shall be classified as non-current.

  • Cash flow from operating activities
  • Cash flow from investing activities
  • Cash flow from financing activities

Knowledge of bookkeeping is important as it provides the analyst with an understanding of the internal coherence of the income statement, balance sheet, statement of changes in owners’ equity and cash flow statement. Furthermore, a thorough knowledge of bookkeeping is paramount in order to carry out a thorough financial statement analysis. Without knowing, say, how capitalising rather than expensing development costs affects the financial statements, the analyst will not be able to make such adjustments, and will, therefore, not be able to make proper decisions.

False – it must be debited the bank account