Financial Statements - Management Discussion and Analysis & Financial Statement Footnotes
I. Management Discussion and Analysis
The Securities Exchange Commission (SEC) requires this section to be included with the financial statements of a public company and is prepared by management
This narrative section usually includes the following;
- A description of the company's primary business segments and future trends
- A review of the company's revenues and expenses
- Discussions pertaining to the sales and expense trends
- Review of cash flow statements and future cash flow needs including current and future capital expenditures
- A review of current significant balance sheet items and future trends, such as differed tax liabilities, among others
- A discussion and review of major transactions (acquisitions, divestitures) that may affect the business from an operational and cash flow point of view
- A discussion and review of discontinued operations, extraordinary items and other unusual or infrequent events
Financial Statement Footnotes
These footnotes are additional information provided to the reader in an effort to further explain what is displayed on the consolidated financial statements.
Generally accepted accounting principles (GAAP) and the SEC require these footnotes. The information contained in these footnotes help the reader understand the amounts, timing and uncertainty of the estimates reported in the consolidated financial statements.
Included in the footnotes are the following:
A summary of significant accounting policies such as:
- The revenues-recognition method used
- Depreciation methods and rates
Balance sheet and income statement breakdown of items such as:
- Marketable securities
- Significant customers (percentage of customers that represent a significant portion of revenues)
- Sales per regions
- Fixed assets and Liabilities (including depreciation, inventory, accounts receivable, income taxes, credit facility and long-term debt, pension liabilities or assets, contingent losses (lawsuits), hedging policy, stock option plans and capital structure.
Supplemental schedules often detail disclosures required by audited statements, as well as the accounting methods and assumptions used by management. Supplemental schedules can include information such as natural resources reserves, an overview of specific business lines, or the segmentation of income or other line items by geographical area or customer distribution.
Management's Discussion and Analysis (MD&A) presents management's perspective on the financial performance and business condition of the firm.
As reporting standards continue to change and evolve, analysts must be aware of new accounting approaches and innovations that can affect how businesses treat certain transactions, especially those that have a material impact on the financial statements. Analysts should use the financial reporting framework to guide them on how to determine the financial statement impact of new types of products and business operations.
One way to keep up to date on evolving standards and accounting methods is to monitor the standard setting bodies and professional organizations like the CFA Institute that publish position papers on the subject.
Companies that prepare financial statements under IFRS or US GAAP must disclose their accounting policies and estimates in the footnotes, as well as any policies requiring management's judgment in the management's discussion and analysis. Public companies must also disclose their estimates for the impact of newly adopted policies and standards on the financial statements.The Auditor and Audit Opinion
Career Education & ResourcesLearn about the difficulty of the CFA exams with a description of the tests, some statistics on pass rates and suggestions that can help you pass the exams.
ProfessionalsA financial analyst researches companies and economic conditions to make business, sector and industry recommendations.
Career Education & ResourcesRead about what it takes to become a financial analyst in a corporation or securities firm, and learn how far you can rise in the profession.
Career Education & ResourcesLearn what education and certifications you need to become a financial planner, as well as the future prospects and earnings potential for financial planners.
Career Education & ResourcesThe non-profit sector offers a stable selection of jobs for those who seek other types of fulfillment from their jobs than just purely financial.
Career Education & ResourcesLearn about the basic requirements for getting hired as a portfolio manager, and discover how most professionals in the field rise into the position.
Your PracticeThese four professional organizations are among the most respected and well known in the industry.
ProfessionalsFind out what equity research analysts do on a day-to-day basis, and learn more about the typical career progression for these securities professionals.
ProfessionalsThe Chartered Financial Analyst Level II exam is the second of three tests that CFA candidates must pass.
ProfessionalsLearn more about the career options available to financial data analysts, and determine whether the profession is a good match for you.
Professionals who help individuals manage their finances by providing ...
Formerly known as the Association for Investment Management and ...
A professional designation given by the CFA Institute (formerly ...
A financial professional who studies various industries and companies, ...
The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
According to the CFA Institute, a person who holds a CFA charter is not a chartered financial analyst. The CFA Institute ... Read Full Answer >>
The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
Prepaid expenses benefit both businesses and individuals. Prepaid expenses are the types of expenses that are bought or paid ... Read Full Answer >>
If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Full Answer >>
You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Full Answer >>