financial statement analysis

Posted in Uncategorized by qmarks on April 16, 2009

Classification of Business Activities

Business activities are classified in three groups;

  • Operating Activities; part of day-to-day business functions.
  • Investing Activities; associated with acquisition and disposal of long term assets
  • Financial Activities; related to obtaining or repaying capital. The two primary sources for funds are owners(shareholders) or creditors.

While analyzing the financial statements, ideally an analyst would prefer that most of a company’s profits (and cash flows) come from its operating activities.


Accounts and Financial Statements

Contra Accounts

Allowance for bad debts, which reduces the accounts receivable accounts

Accumulated depreciation, an offset to property plant and equipment 

Sales returns and allowances, an offset to revenue reflecting any cash refunds, credits on account, and discounts from sales prices given to customers who purchaes defective or unsatisfactory items.

owners equity is the residual claim of the owners; you may find them on some financial reports of UK based firms. Others terms are used to denote owners’ equity  including shareholders’ equity, stockholders’ equity, net worth, net book value, and partners’ capital. the exact title depends upon the type of entity.

owners’ equity = contributed capital + retained earnings

Some synonyms

Revenue= sales and turnover (in UK)

net income = net profit and net earnings

balance sheet = statement of financial position

income statement= statement of operations, statement of income, statement of profit and loss


The balance sheet represents a company’s financial position at a point in time, and the income statement represents a company’s activity over a period of time. The two statements are linked together through the retained earnings component of owners ’ equity. 


in income statement

Ending retained earnings = beginning retained earnings + net income -dividends

Ending retained earnings = beginning retained earnings + revenue – expenses – dividends

in balance sheet

assets = liabilities + contributed capital + ending retained earnings

assets = liabilities + contributed capital + beginning of retained earnings + revenue – expenses – dividends



The statement of retained earnings shows the linkage between the balance sheet and income statement



In US. the Office of the Comptroller of the of the currency charters regulates all national banks.

Banking specific regulatory boards may establish requirements related to risk – based capital measurement, minimum capital adequacy, provisions for doubtful loans and minimum monetary reserves. 

IASB international accounting standards board

IOSCO International organization of securities commissions

EU European Uninion for capital markets regulations

US SEC fillings


  • 10-K, 20-F, 40-F.  Filled annually. Form 10-K is for US registrants, 40-F is for certain Canadian registrants and 20-F is for all other non-US registrants.
  • Annual Report. In addition to SEC’s annual filings. most companies prepare an annual report to shareholders. That is not a requirement of SEC
  • Proxy Statement/Form DEF-14A. The SEC requires that shareholders should receive a proxy statement prior to annual meeting. A proxy is an authorization from the shareholder giving another party the right to cast its vote.
  • Forms 10-Q and 6-K. These are forms that companies are required to submit for interim periods. Quarterly for US companies on Form 10-Q, semiannually for many non-US companies on 6-K
  • Form 8-K. The current report to announce major events.
  • Form 144. This form must be filed with the SEC as notice of he proposed sale of restricted securities or securities held by an affiliate of the issuer in reliance on Rule 144.
  • Forms 3,4, and 5.  To report beneficial ownership of securities. 
  • Form 11-K Annual report of employee stock purchase, savings and similar plans.
















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