Financial Statements Analysis cheat sheet

Key terms

Financial reporting

The company's own responsibility: preparing and communicating financial statements that fairly represent its performance, position and cash flows to those outside the business.

Financial statement analysis

The user's responsibility: applying analytical judgement and technique to that reported information to answer a specific decision question, an investor's buy/sell decision, a lender's credit decision, a regulator's oversight question.

International Accounting Standards Board (IASB)

Sets International Financial Reporting Standards (IFRS), the framework Kenyan companies, and this paper, are built around.

Financial Accounting Standards Board (FASB)

Sets US Generally Accepted Accounting Principles (US GAAP), the dominant alternative framework, materially converged with IFRS in many areas but still differing in specific rules an analyst comparing companies across the two frameworks must watch for.

Regulatory authorities

National bodies (in Kenya, the Capital Markets Authority, covered in CIFA Regulation of Financial Markets) that mandate which framework listed companies must use and enforce compliance with it.

The financial statements themselves

The statement of financial position, statement of comprehensive income, statement of cash flows and statement of changes in owners' equity, this guide's core subject matter, taken up in the chapters on reporting and on analysing the statements.

Notes to the financial statements

Disclose the accounting policies applied and the detail behind the summarised figures, frequently where the analytically important information actually lives.

Auditor's report

States whether the financial statements give a true and fair view, and flags any material uncertainty or qualification the analyst should weigh.

Management commentary

Management's own narrative discussion of performance, strategy and outlook, useful but, unlike the audited statements, not independently verified.

Supplementary information, sustainability and integrated reports

Additional voluntary or required disclosure, increasingly including climate and sustainability reporting (see the final chapter, on climate change).

Regulatory filings and press reports

Filings with the CMA (see CIFA Regulation of Financial Markets) and independent press coverage, both useful cross-checks against the company's own presentation of itself.

Top-down approach

Starts from the macroeconomic environment, narrows to the industry, and finishes at the individual company, useful for understanding the broad forces shaping a company's results before examining the company itself.

Bottom-up approach

Starts directly from company-specific analysis, financial statements, competitive position, and builds outward to industry and macro context only as needed to interpret company-specific findings.