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Capstone Final - Accounting Analysis || with Accurate Answers 100%.

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Capstone - Accounting Analysis

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Capstone - Accounting Analysis

Objective of Accounting Analysis: correct answers How well the accounting system captures business reality Identify places where there is accounting flexibility (to eventually "undo" potential distortions" What is the purpose of accounting analysis in performing firm valuation? correct answer...

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Uploaded on October 17, 2024
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objective of accounting analysis

Institution Capstone - Accounting Analysis
Course Capstone - Accounting Analysis

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Capstone Final - Accounting Analysis || with Accurate
Answers 100%.
Objective of Accounting Analysis: correct answers How well the accounting system captures
business reality

Identify places where there is accounting flexibility (to eventually "undo" potential distortions"

What is the purpose of accounting analysis in performing firm valuation? correct answers
Evaluate the degree to which a firm's accounting policies capture its underlying business reality
(or underlying business economics)

Return on Equity (ROE) correct answers How much the firm is returning back to shareholders to
compensate them for the capital provided

ROE = (Net income / Book Value of Equity)

The greater the ROE . . . correct answers the more effectively the business generates revenue and
growth from equity funding

Accounting quantities (i.e., numerical disclosures) are just correct answers a subset of the
disclosures which managers have report to investors via regulatory filings (10-K, 10-Q, etc.)

Disclosure of information is a broader concept than: correct answers the reporting of accounting
numbers

Why Accrual Accounting? correct answers Investors demand information on a periodic basis
(accrual) because Cash Accounting does not report the full economic consequences of
transactions in a given period

Accural Accounting correct answers Economic transaction are reported based on expected, not
actual, cash receipts and payments

Since managers have (1) ________ ________ of the firm's business, they are entrusted with the
task of (2) _______ ___ __________ _________ in portraying complex transactions using the
(3) _____________ __ _______ ________. correct answers (1) superior knowledge
(2) making the appropriate judgments
(3) framework of accrual accounting

Delegation of reporting decisions to managers correct answers Has costs and benefits:

Accounting Rules (GAAP) and Auditing are designed to minimize these costs while preserving
the benefits

GAAP correct answers Allows for consistency in reporting

, Objective: Minimize managers' ability to manipulate financial statement info

Potential sources of noise and bias in accounting data include: correct answers 1) Noise
introduced by rigid accounting rules
- impossible to restrict managerial discretion without reducing information content

2) Forecast Errors:
- managers cannot perfectly predict future economic consequences of current transactions

3) Managers' Accounting Choices:
- accounting decisions introduce bias (ex: management compensation)

Analysts should perform the following steps when evaluating the accounting quality of a firm:
correct answers 1) Identify Principal Accounting Policies
2) Assess Accounting Flexibility
3) Evaluate Accounting Strategy
4) Evaluate the Quality of Disclosure
5) Identify Potential Red Flags
6) Undo Accounting Distortions

Identify Principal Accounting Policies correct answers Connection of Accounting and Business
Strategy

Examples:
1) R&D crucial for a pharmaceutical or biotech firm
2) Inventory management critical for a retail firm
3) Product defects after sales important for a manufacturer
4) Credit risk is crucial for a bank

Assess Accounting Flexibility correct answers Accounting systems need to have an optimal level
of flexibility

Balance managers' ability to properly inform investors of their superior information while
minimizing potential distortions

When managers have accounting flexibility, they can use it either to: correct answers Properly
communicate the firm's economic fundamentals, orHide true performance

How do managers exercise their flexibility? correct answers 1) How do the firm's accounting
policies compare with its industry peers?

2) Do managers face strong incentives to manage earnings (avoid covenant violations, meeting
bonus targets)?

3) Has the firm changed accounting policies or estimates (and what is the justification for it)?

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