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Folder:
115 CFA
File:
115.040.12.05 Financial Analysis - Reading 30 - 5. Analyst Adjustments to Reported Financials

5. Analyst Adjustments to Reported Financials

e. explain appropriate analyst adjustments to a company's financial statements to facilitate comparison with another company.

When an analyst is comparing companies and has to make adjustments to financial statements, what are Investments Adjustments?
Different categories of investment securities have different treatment regarding unrealized holding gains and losses. They can be either:
- Trading securities - unrealized gains and losses are recognized on the income statement as part of the net income
- Available-for-sale securities - unrealized gains and losses are recognized on the balance sheet as part of other comprehensive income.

When an analyst is comparing companies and has to make adjustments to financial statements, what are Inventory Adjustments?
If a company not reporting under IFRS uses LIFO but another company uses FIFO, comparison of the two companies may be difficult.

When an analyst is comparing companies and has to make adjustments to financial statements, what are Property, Plant and Equipment?
Companies may choose different depreciation methods (e.g., a straight-line method or an accelerated method) and accounting estimates (e.g., salvage value or useful life) related to depreciation.

When an analyst is comparing companies and has to make adjustments to financial statements, what is Goodwill?
Goodwill is recorded as an asset if one company purchases another for a price that is more than the fair value of the assets acquired. Internally generated goodwill is not recorded on the balance sheet. Adjustments are needed to compare two otherwise comparable companies when one has a recorded goodwill asset.


Source:
  • CFA