Analysis of Published Financial Statements

Question 1

What is meant by stewardship accounting?

Answer 1

• Traditional approach of accounting under which the owners of a business (the shareholders) entrust the management in managing the business
• Shareholders entrust the BoDs with the responsibility for managing the resources entrusted to them by giving it direction and providing both control and strategy.
• The Board employs managers to implement their strategic vision and to maximise the returns of the wealth of the shareholders.
• An obligation of stewards or agents, such as Directors, is to provide relevant and reliable financial information relating to resources over which they have control, but which are owned by others.

Question 2

Who are the interested parties and how do they benefit from the analysis of financial statements?

Answer 2

Different parties interested for different reasons: investors, management, employees, lenders, suppliers, trade creditors, tax authorities, government and their agencies, researchers and stock exchanges

• Financial statements are prepared for decision-making purposes, which is driven by effective analysis and interpretation of financial statements
• Financial analysis indicates the profitability and financial soundness of a bsuiness entity for a given period.
• It determines its financial strengths and weaknesses by assessing the efficiency and performance of an entity.

Key measures include: evaluation of profitability; financial trends of achievements; growth potential; comparative position in relation to similar businesses; assessment of overall financial strength; assessment of solvency.

Question 3

What are the key objectives of fundamental analysis and its components?

Answer 3

Fundamental analysis is a systematic approach to evaluating company performance based on historical data.

The end goal of this analysis is to generate an insight about the company’s future performance and business forecast.

It is also used: to derive the valuation of the company; to evaluate the performance of the company management and conduct internal audit of its business decisions; to determine the intrinsic value of the share or the company’s intrinsic value and its growth prospects

The components of fundamental analysis are: economic analysis (including of GDP, interest rates, employment, foreign exchange, manufacturing; industry analysis (including of competitors, industry lifecycle, Porter’s five forces); company analysis (including of business assets, liabilities, earnings)

Question 4

What are Porter’s five forces?

Answer 4

Porter’s Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry’s weaknesses and strengths. Five Forces analysis is frequently used to identify an industry’s structure to determine corporate strategy.

Porter’s 5 forces are:

Competition in the industry
Potential of new entrants into the industry
Power of suppliers
Power of customers
Threat of substitute products