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2. Accounting and Auditing in Financial Analysis
- The Chinese University of Hong Kong Press
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Chapter 2 Accounting and Auditing in Financial Analysis This chapter gives an overview of certain accounting and auditing subjects relevant to financial analysis and includes the following sections: • Annual Reports • Accounting • Companies • Statutory Audits of Financial Statements • Audit Report Financial analysts involve studying a corporation’s past records of assets, liabilities, profits, sales, cost structure, business volume and quality of management with a view to gauging the degree of a corporation’s position and success and predicting the future trends. All these factors are often reflected in financial statements, and a basic understanding of accounting and auditing is therefore required. However, there are other key areas beyond accounting and financial statements relevant to financial analysis. Accounting is mainly concerned with financial statements and their explanatory notes (see Chapter 3), but there are other important sections in corporations’ annual reports, including chairman’s statement, management discussion and analysis, corporate governance report, directors’ report, independent auditor’s report and financial summary. 18 Financial Analysis in Hong Kong (Second Edition) Annual Reports Table 2.1 lists out the respective sections as detailed in the 2011/2012 annual reports of One Media, AAC, Ka Shui, CMMB and Neo-Neon. Table 2.1 Various sections in 2011/2012 annual reports Sections One Media AAC Ka Shui CMMB Neo-Neon Corporate Information 3 3 3 3 3 Group’s Principal Activities 3 Chairman’s Statement 3 3 3 3 3 Management Discussion and Analysis 3 3 3 3 3 Financial Highlights 3 Events of the Year 3 Biographies of Directors and Senior Management / Directors and Senior Management / Directors and Senior Management Profiles 3 3 3 3 Report of Directors / Directors’ Report 3 3 3 3 3 Corporate Governance Report 3 3 3 3 3 Independent Auditor’s Report 3 3 3 3 3 Consolidated Income Statement 3 3 Consolidated Statement of Comprehensive Income 3 3 3 3 3 Consolidated Statement of Financial Position / Consolidated Balance Sheet 3 3 3 3 3 Statement of Financial Position / Balance Sheet 3 3 Consolidated Statement of Changes in Equity 3 3 3 3 3 Consolidated Statement of Cash Flows 3 3 3 3 3 Notes to the (Consolidated) Financial Statements 3 3 3 3 3 Financial Summary / Fiveyear Financial Summary 3 3 3 3 3 [44.211.116.163] Project MUSE (2024-03-29 07:14 GMT) 2. Accounting and Auditing in Financial Analysis 19 Different corporations have their own ways to categorize and label information in various sections of annual reports. Regardless of the number and title of individual sections that these corporations may have, larger corporations tend to disclose their information more extensively from wider perspectives, such as the area of sustainability. Global Reporting Initiative (GRI), founded in 1997, is a non-profit organization which works towards a sustainable global economy by providing sustainability reporting guidance. GRI promotes economic, environmental and social sustainability, and a sustainability report enables corporations to report sustainability information in a way similar to financial reporting. Systematic sustainability reporting gives comparable data, with agreed disclosures and metric. A sustainability report gives information about four key areas: economic, environmental, social and governance performance. International Organization for Standardization (ISO) 26000 provides guidelines for social responsibility and has some similar requirements as GRI. More recently, Integrated Reporting (IR) has been introduced as a process which results in communication by an organization, most visibly through a periodic integrated report, about value creation over time. Six capitals referring to the stores of value have been defined which include natural capital. Many corporations now report their sustainability separately from the annual reports, such as the Sustainability Report of China Mobile Limited and the Sustainability Report of HSBC Holdings plc, which both contain very comprehensive information in those aspects. Accounting Accounting may be viewed as the common business language of translating transactions and events into numbers and communicating the financial performance to the outside world.1 Without accounting, the management may well be the only person knowing how a corporation does and stands financially. Still, the management does not have the records showing how much inventory is being held, how much the corporation owns and how much the corporation owes. The traditional purposes of accounting are to classify and record monetary transactions and to present the financial result of a corporation.2 20 Financial Analysis in Hong Kong (Second Edition) In addition, financial statements are to show the results of the stewardship of management or the accountability of management for the resources entrusted to it. Today’s accounting exists in a...