Financial statement analysis

Published on July 30, 2020   13 min
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Hello and welcome to Financial Statement Analysis for the CFA exam. I'm Professor Michael McDonald, and today I'd like to talk to you about financial statement analysis in the investments field, particularly as it relates to the CFA exam.
Financial statement analysis is a major section on the CFA exam. You'll need to be able to describe the role of the statement of financial position, the statement of comprehensive income, statement of changes in equity, and the statement of cash flows and think about how these different statements help us to evaluate a company's performance and financial position.
To begin with, let's just start by identifying the three major types of financial statements. The three major financial statements that you'll see out there, regardless of the accounting system that's used are: the balance sheet, the income statement, and the statement of cash flows. Each of these tells us something different and something critical to understanding the health of the business. That's why, while there are big differences between GAAP and IFRS, you still see each of these three financial statements forming the core of this system. In fact, even smaller firms that are say, privately owned and don't put out GAAP compliant or IFRS compliant financial statements, they still typically produce these three basic financial statements.
Let's start with the balance sheet. The balance sheet gives us the summary of the financial position for a company at a particular point in time. It's really composed of three things: assets, liabilities, and owner's equity, sometimes called shareholder's equity. Assets is everything the company owns. It's their cash, their inventory, their land, their buildings, equipment, as well as accounts receivable, which is money owed to the firm, and then intangible assets, things like their brand name, patents they might hold, etc. Liabilities are everything that the company owes. That's the accounts payable, notes payable, mortgage payments, things like that. The difference between these two, assets minus liabilities is the net worth of the company essentially. It's the net assets after we've paid off all of our debts.