Accounting Analysis

Question 1

Assets

Answer 1

• historic cost and conservatism

- historic prices are used because they are more verifiable and less able to be manipulated

Question 2

Asset reporting challenges

Answer 2

• ownership of resource (analysts need to ask what resources are excluded from a company’s balance sheet because ownership is uncertain)
• Certainty of benefits( future economic benefits are difficult to measure)
• changes in value (what type of assets should be marked up or down)
• Goodwill can be overstated

Question 3

Liabilities

Answer 3

• Economic obligations
• important assessment of financial risks
• challenges when there is ambiguity whether an obligation has really been incurred

Question 4

Equity

Answer 4

• gap between assets and liabilities
• residual claim
• challenges relate to reporting assets and liabilities effect on equity