1 / 10

Financial Statement Analysis

Financial Statement Analysis. Acct 592 July 10, 2003. Chapter 4. Relevant Financial Statement Data for Analysis. Why Data May be Incomparable. Sustainability, measurement, or manageability of reported earnings may be at issue* Previous years are restated in the current year

jalen
Download Presentation

Financial Statement Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Financial Statement Analysis Acct 592 July 10, 2003

  2. Chapter 4 Relevant Financial Statement Data for Analysis

  3. Why Data May be Incomparable • Sustainability, measurement, or manageability of reported earnings may be at issue* • Previous years are restated in the current year • Items are classified in different ways across firms • Statements are prepared for different time periods across firms • Accounting principles differ across countries* * Indicates most problematic issues

  4. Earnings ManagementandEarnings Sustainability

  5. Earnings Quality • Underlying reported earnings is the assumption that it represents a reasonably accurate measure of the economic value-added by the firm during the reporting period and the economic value likely to be added in future periods. • The correlation between earnings and EVA may be compromised by these factors: • Inclusion in reported earnings of nonrecurring items • Inadequacy of accounting systems to measure EVA from operations accurately and reliably • The opportunity to manage or manipulate the level or trend of reported earnings

  6. Earnings Sustainability – 8 categories of financial disclosures used to judge • Discontinued Operations • Extraordinary Gains and Losses • Changes in Accounting Principles • Impairment on Long-Lived Assets • question: where shown?

  7. Earnings Sustainability Factors (con’t) • Restructuring Charges • Changes in Estimates • Gains and Losses from Peripheral Operations • Management Discussion and Analysis

  8. Earnings Sustainability • Comprehensive Income “Income” shown in Stockholders’ Equity • As compared with “Income” shown on the Income Statement • How do Intangible Assets impact Earnings?

  9. Earnings Management • Choices, judgments, and estimates • Distinction between management within bounds of GAAP and fraud is often thin • Why manage? • Earnings smoothing • Compensation incentives • Job security incentives • Can’t “manage” forever • Capital markets penalize “extreme” managers

  10. 3 Basic Ways to Manage • Selection of accounting principles • Application of accounting principles • Timing of asset acquisitions and dispositions • Violations observed often involve revenue recognition and shifting of expenditures.

More Related