#198 How would you analyze the financial statements

How would you analyze the financial statements - Accounting

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Free Chegg Question

1. How would you analyze the financial statements of a firm? Explain each step thoroughly.

2. Suppose two companies acquire a machinery for use in operations. Company A expenses the transaction whereas, company B capitalizes the same transaction. What repercussions will this have on the financial reporting?

3. Statement of projected future cash flows is least likely be required by SECP for a company filing for registration. Why?

4. Hihotech Company reported net income of 2.3 million for the year ended 20XX and had a weighted average of 800,000 common shares outstanding. At the beginning of the fiscal year, the company has option of 30,000 with an average exercise price 35. No potentially dilutive securities are outstanding. Over the fiscal year, the company’s market price averaged 55 per share.

Required:

a) Calculate company’s basic and diluted EPS under IFRS and US GAAP
b) It has been argued that both methods will yield the same results but the underlying justification employed by both methods is different.

Explain these with rationale justifications.

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Free Chegg Answer

1.You can analyze the financial statement by following given steps:

i)First,collect the firm's financial statements from the last 3 to 5 years for comparison.

ii)Analyze these financial statements and scan them in order to look for large movements in specific items from one year to another.Also,look for suspicious activity for instance,did the company sell off some of its operations during the period under anlaysis.

iii)Always review the financial statements' notes.These notes may have information that could be important in your analysis.

iv)Analyze the balance sheet to see if there are large changes in the company's assets,liabilities or equity.

v)Analyze the income statement to find out trends over time.

vi)In next step,analyze firm's cash flow statement to know method of utilisation of cash and its source.

vii)Gather firm's competitors data and compare it with firm's performance.

viii)Calculate financial ratios of the firm and compare it with those of competitors.

These steps help you analyze the firm's financial statements.

Answering question first as per Chegg's guidelines: