This study session introduces the principal information sources used to evaluate a company’s financial performance. Primary financial statements (income statement, balance sheet, cash flow statement, and statement of changes in equity) in addition to notes to these statements and management reporting are examined. A general framework for conducting financial statement analysis is provided. The session also includes a description of the roles played by financial reporting standard-setting bodies and regulatory authorities.

This study session addresses the three major financial statements—the income statement, the balance sheet, and the cash flow statement—by examining each in turn. The purpose, elements of, construction, pertinent ratios, and common-size analysis are presented for each major financial statement. The session concludes with a discussion of financial analysis techniques including the use of ratios to evaluate corporate financial health.

This study session examines financial reporting for specific categories of assets and liabilities. Inventories, long-lived assets, income taxes, and non-current liabilities are examined in greater detail because of their effect on financial statements and reported measures of profitability, liquidity, and solvency. For these items, in particular, the analyst should be attentive to chosen accounting treatment, the corresponding effect on reported performance, and the potential for financial statement manipulation.

This study session introduces the concept of financial reporting quality. The session examines the financial reporting quality differences that may exist between companies and the means for identifying them. Warning signs of poor or low-quality reporting are covered. The application of financial analysis techniques to evaluate a company’s past and projected performance assess credit risk, and screen for potential equity investments follows. Common adjustments to reported financials to facilitate cross-company comparisons conclude the session.