The Six Components of the Code of Ethics and the Seven Standards of Professional Conduct
The CFA Code of Ethics and the seven Standards of Professional Conduct serves as a broad ethical guideline for Members and Candidates of the CFA Institute. All CFA Members and candidates are expected to adhere to the Codes and Standards…
Issues Related to Balance Sheet Modifications, Earnings Normalization, and Cash Flow Statement Related Modifications on a Company’s Financial Condition
Earnings Quality and Cash Flow Analysis Earnings quality refers to the persistence and sustainability of a company’s earnings. High-quality earnings imply that a company’s accounting estimates are unbiased. Additionally, it means that the earnings are derived from sustainable rather than…
Evaluating the Effects of Change in Accounting Standards, Methods or Assumptions on the Financial Statements and Ratios
Users of financial statements must be cognizant of proposed changes in accounting standards because of the impact they have on financial statements and a firm’s valuation. We anticipate significant changes in the accounting standards over the next few years as…
Relevant Adjustments for Improving Quality and Comparability with Similar Companies
Off-Balance-Sheet Financing Off-balance-sheet financing is an accounting practice where companies exclude liabilities on their balance sheet and the associated interest expense on the P&L. Operating lease is a typical example of off-balance-sheet financing. It is an expense that is kept…
Financial Reporting Choices and Bias that Affect the Quality and Comparability of a Company’s Financial Statements
Assume that our purpose for analysis is to identify and evaluate the drivers of financial success for ABC Ltd., a publicly held company in India, which is a leading car manufacturer. Further, we want to identify and understand the risks…
Use of a Framework to Analyze a Firm’s Financial Statements
Financial analysis is crucial as it aids investors and other financial decision-makers to work out effective economic decisions. This ensures that the possibility of a successful outcome is on the decision maker’s side. A basic framework to aid in financial…
Evaluation of Earnings Quality
We analyze companies’ earnings to understand the earnings quality, i.e., the persistence and sustainability of earnings. Many accounting policies demand estimations and rely on subjective decisions. Some managers take advantage of this and indulge in creative accounting to report misleading…
Sources of Information about Risk
Examining financial, operating, and other risks is an essential part of an analyst’s job. Here, we discuss sources of information about risk. Financial Statements A company’s financial statements provide useful indicators of financial, operating, or other risks. For example, leverage…
Evaluation of the Balance Sheet Quality of a Company
Recall from the previous section that high financial reporting quality of the balance sheet is stipulated by completeness, unbiased measurement, and clear presentation. The existence of off-balance-sheet liabilities (obligations) such as debts compromises the completeness of a balance sheet. Also,…
Indicators of Balance Sheet Quality
Completeness, unbiased measurement, and clear presentation indicate high financial reporting quality of the balance sheet. Moreover, a strong balance sheet has an optimal leverage amount, adequate liquidity, and economically successful asset allocation. Balance sheet strength is assessed using ratio analysis….
