It is important for an analyst of financial statements to be able to determine how much confidence he or she should place in the accuracy and completeness of those statements. This can be done by reading the accountant’s report attached to the financial statements that explains the accountant’s level of service provided and in some cases includes an opinion statement giving the accountant’s opinion regarding the financial statements as a whole.
Accountants offer three levels of financial statement service: Compilations, reviews, and audits. In a compilation, the accountant simply compiles and reports a company’s financial statement data without rendering an opinion on the content. In a review, the accountant does not express an opinion on the financial statement but does provide a limited assurance that nothing has come to the accountant’s attention to suggest that the financial statements are materially misstated. In an audit, an accountant performs enough work to be able to issue a report expressing a professional opinion about whether the company’s financial statements fairly represent the financial condition of the company. For instance, if no accountant’s report is attached to a set of financial statement, the user of the financial statement should assume that the financial statements have been completed by the company with no involvement from its outside accountant. As users of these financial statements, they must base on their knowledge of the company, its management, and the industries make their own judgments as to the quality and integrity of the information provided.
A complete set of financial statement also includes notes in the financial statements, which contain additional details that are disclosed to explain the information presented in the financial statements. The information provided is essential to understanding the statements and has therefore been considered an integral part of the financial statements prepared in accordance with GAAP. The information in the notes include a brief description of the nature of the company’s operations, a summary of significant accounting policies, details regarding long-term debts, a summary of contingencies and other commitments, business segment reports, and any other explanations management deems necessary to make the financial statements more understandable to the users.
These notes to the financial statements, along with the financial statements themselves, are included in the annual report that companies provide to their shareholders. The SEC requires a publicly traded company to keep its shareholders informed of the state of its business on a regular basis. The professionals find the annual report a valuable source of information about the company’s business purpose and philosophy, its financial results, and its direction for the future. This information helps provide a general background for making specific business decisions.
The annual report consists of sections required by the SEC and other information the company believes is appropriate to provide. The required sections include the financial statements and notes, auditor’s report, report of management, MD&A, and selected financial data. Additional information usually provided by companies (but not required) includes financial highlights, letter to shareholders, corporate message, Board of directors and management, and other corporate information.
Another valuable source of information for publicly traded companies is SEC filings. The filings that the users of financial statements access most often are the annual Form 10-K report, the quarterly Form 10-Q, and the Form 8-K material event report. These forms are easily accessible from the SEC vial the internet suing the SEC’s EDGAR system.
Beyond company-prepared information, Individuals and organizations that need more information can access external sources such as rating agencies, credit bureaus, analysts‘ reports, and news articles containing information about general economic conditions or expectations, political events and climate, and industry outlook. Rating agencies develop and report ratings on their opinion about a company’s ability to meet its financial obligations. Credit bureaus provide a forum for obtaining information on how much credit a company has, how long it has had credit, and whether it pays its bills on time. Analyst reports analyze a security or a security’s issuer and provide enough information to make an investment decision. News articles in the business press, and on radio, television, or the internet, provide background on the economy, specific industries, and specific companies.
Taken together, this information allows the users to develop an understanding of the actual operations of a company, its financial stability, and its future directions. Once a professional has gathered financial information regarding a particular company under review, he or she can undertake financial statement analysis to examine the company’s results and compare them with the results of other companies.
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Source by Shubhra