Financial accounting
Users of financial statements:
- Shareholders main focus of IFRS on these capital providers
- Banks/ creditors
- Customers/ suppliers
- Employees
- Government (regulators, tax authorities)
- ‘Society’ (e.g. NGOs)
Strategy analysis: helps us to understand the company (what the company is doing in a
qualitative sense).
Accounting analysis: taking a closer look at what the company does in their financial
statements. Both in terms of key decisions but also in terms of understanding why they took
these decisions.
Financial analysis: tries to understand the performance of the company. How well did the
company perform in a given year?
Prospective analysis: what are the prospects of the company? Looks at the future.
Importance of four-step analysis:
Managers have better information about companies’ prospects than investors. The four
steps help analysts assess a firm’s performance and prospects to uncover managers’ inside
information.
Strategy analysis helps analysts understand the underlying economics of the firm and the
competition in the respective industry. Benefits include:
- Understanding a firm’s strategy provides a context for evaluating a firm’s accounting
policies.
- It highlights the firm’s profit drivers and major areas of risk.
- Analysts can also assess the connection between a firm’s strategy and its financial
policies.
Strategy analysis is an important step in financial statement analysis because it places the
firm in its environment and assesses performance qualitatively.
, Accounting analysis helps the analyst to reverse accounting distortions by adjusting the
reported figures. Financial analysis uses financial data to evaluate a firm’s performance.
Prospective analysis synthesizes the insights from the previous steps to make predictions
about a firm’s future and estimate the value of the firm.
Accounting distortions arise because
- There is a mismatch between accounting standards and underlying economics
- Analysts disagree with management’s discretionary decisions.
Financial reporting and capital markets
Accrual accounting: transactions are recorded in the period in which they occur rather than
when we have the cashflow.
à Revenue is recognized when it is earned.
Factors that affect financial reporting:
- Accounting conventions and standards (“local dialects”)
o European listed firms are required to apply IFRS.
- Auditing and the regulatory framework
IFRS – International Financial Reporting Standards
à Set of accounting rules for the financial statements of public companies that are
intended to make them consistent, transparent and easily comparable around the world.
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