Chapter 7 - Test your knowledge

Question 1

What is meant by stewardship accounting?

Answer 1

Stewardship refers to the traditional approach of accounting under which the owners of a business (the shareholders) entrust the management in managing business.

Shareholders entrust the board of directors 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 and 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 are interested in financial statements and their analysis for various reasons. These parties include 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 business entity for a given
period.

It determines its financial strengths and weaknesses by assessing the
efficiency and performance of an entity.

Key measures include:

1. evaluation of profitability
2. financial trends of achievements
3. growth potential
4. comparative position in relation to similar businesses
5. assessment of overall financial strength
6. 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:

1. to derive the valuation of the company
2. to evaluate the performance of the company management and conduct
   internal audit of its business decisions
3. to determine the intrinsic value of the share or the company’s intrinsic
   value and its growth prospects.

The components of fundamental analysis are:

1. economic analysis, including analysis of:

– GDP
– interest rates
– employment
– foreign exchange
– manufacturing

2. industry analysis, including analysis of:
   – competitors
   – industry lifecycle
   – Porter’s five forces
3. company analysis, including analysis of:
   – business assets
   – liabilities
   – earnings