Lecture 1

Question 1

Who are the ‘users’ of financial statements?

Answer 1

Shareholders
Banks
Creditors
Customers
Employees
Government

Question 2

What are the inputs of the financial statement analysis?

Answer 2

Inputs
- Financial statements
- Other public information

Question 3

What are the Outputs (objectives) of the financial statement analysis?

Answer 3

Outputs (objectives)
- Equity / Debt analysis
- Mergers & acquisitions

Question 4

What are the four components of the analysis tools?

Answer 4

• Strategy analysis
• accounting analysis
• Financial analysis
• prospective analysis

Question 5

What are the two components of the strategy analysis?

Answer 5

Industry analysis
Competitive strategy analysis

Question 6

What are the two components of the accounting analysis?

Answer 6

Accounting Policies
Accounting ‘distortions

Question 7

What are the two components of the Financial analysis?

Answer 7

Ratio analysis
Cash flow analysis

Question 8

What are the two components of the prospective analysis?

Answer 8

Forecasting
Valuation

Question 9

Financial reporting

Answer 9

Financial reporting entails the disclosure of financial (and related) information about a company’s financial performance in a certain period. Financial statements are the chief instrument to do that.

Question 10

What problem arises from inside information and public information?

Answer 10

Information Asymmetry

Question 11

What problem arises from compensation for management and dividends for stakeholders?

Answer 11

Conflicting interests

Question 12

What is the switch between firm management and investors/capital market of a company?

Answer 12

Financial reporting

Question 13

What do financial statements do?

Answer 13

Financial statements measure and summarize the economic consequences of business activities and need to be reported on an annual, semi-annual and/or quarterly basis

Question 14

What do financial statements comprise?

Answer 14

Income statement
Balance sheet
Cash flow statement
Statement of changes in equity
Notes

Question 15

Profit - cashflow =

Answer 15

Changes in other balance sheet items. *ignoring transactions with owners and other direct changes in equity

Question 16

What are the three business activities relevant for accounting?

Answer 16

Operating
Investing
Financing

Question 17

Which two components are the business context?

Answer 17

• Business environment en markets
• Accounting evironment and regulations

Question 18

Which two components does the ‘business decisions’ have?

Answer 18

• Business strategy and positioning
• Accounting Strategy and policies

Question 19

Which two components has the Accouting system?

Answer 19

Business ‘context’ & Business ‘Decisions’

Question 20

On which two major themes/ influences do we focus on financial reporting?

Answer 20

• Accrual accounting and discretion
• Managers’ influence on financial statements

Question 21

Which two other factors affect financial reporting?

Answer 21

• Accounting conventions and standards (‘local dialects’)
• Auditing and the regulatory framework

Question 22

What is the key takeaway in accounting?

Answer 22

There is no ‘objective truth’ in accounting

Question 23

Which financial statement elements does the IFRS define?

Answer 23

• Revenues, expenses (income statement)
• Assets, liabilities, equity ( balance sheet)

Question 24

Accrual accounting

Answer 24

Transactions are recorded when they occur, rather than at the time of a cash flow

Question 25

How do you calculate Net income in accouting terms?

Answer 25

Net income = Cash Flow + Accruals

Question 26

Accrual accounting means that there is a trade-off due to the next four elements:

Answer 26

• Accounting estimates – What is the ‘right’ number?
• Flexibility in standards – How much discretion to ‘choose’ a number?
• ‘Imperfect’ rules – Do the rules (still) reflect the current environment?
• Managers’ incentives – Do they want to present the ‘right’ number?

Question 27

What are certain incentives to ‘distort’ accounting numbers?

Answer 27

Management compensation
Debt contracts

Question 28

Why is there a trade-off surrounding management discretion?

Answer 28

Because of the reasons to ‘distort’ accounting numbers

Question 29

What is a measure to stop discretability of accounting numbers?

Answer 29

The responsibility statement - where management needs to sign the numbers

Question 30

What are Gaap* measures?

Answer 30

The additional financial measures the management considers relevant for investors.

Question 31

Where does GAAP stand for?

Answer 31

Generally Accepted Accounting Principles

Question 32

What is the biggest keytake away of week 1?

Answer 32

Financial accounting is more than just journal entries. It provides valuable information to capital markets.

Yet financial statement analysis is needed to understand the information conveyed, as there is often no clear ‘right’ or ‘wrong’ in accounting.

Niet alleen boekhouden, ook doorgronden verhaal achter cijfers!!

Question 33

Where do the financial statements analysis looks at and what is it objective?

Answer 33

It looks at the accounting choices made in financial statements as well as any incentives managers have in making these choices.
- The objective is to uncover relevant information contained in financial statements