Lecture 1 Flashcards
Who are the ‘users’ of financial statements?
Shareholders
Banks
Creditors
Customers
Employees
Government
What are the inputs of the financial statement analysis?
Inputs
- Financial statements
- Other public information
What are the Outputs (objectives) of the financial statement analysis?
Outputs (objectives)
- Equity / Debt analysis
- Mergers & acquisitions
What are the four components of the analysis tools?
- Strategy analysis
- accounting analysis
- Financial analysis
- prospective analysis
What are the two components of the strategy analysis?
Industry analysis
Competitive strategy analysis
What are the two components of the accounting analysis?
Accounting Policies
Accounting ‘distortions
What are the two components of the Financial analysis?
Ratio analysis
Cash flow analysis
What are the two components of the prospective analysis?
Forecasting
Valuation
Financial reporting
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.
What problem arises from inside information and public information?
Information Asymmetry
What problem arises from compensation for management and dividends for stakeholders?
Conflicting interests
What is the switch between firm management and investors/capital market of a company?
Financial reporting
What do financial statements do?
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
What do financial statements comprise?
Income statement
Balance sheet
Cash flow statement
Statement of changes in equity
Notes
Profit - cashflow =
Changes in other balance sheet items. *ignoring transactions with owners and other direct changes in equity
What are the three business activities relevant for accounting?
Operating
Investing
Financing
Which two components are the business context?
- Business environment en markets
- Accounting evironment and regulations
Which two components does the ‘business decisions’ have?
- Business strategy and positioning
- Accounting Strategy and policies
Which two components has the Accouting system?
Business ‘context’ & Business ‘Decisions’
On which two major themes/ influences do we focus on financial reporting?
- Accrual accounting and discretion
- Managers’ influence on financial statements
Which two other factors affect financial reporting?
- Accounting conventions and standards (‘local dialects’)
- Auditing and the regulatory framework
What is the key takeaway in accounting?
There is no ‘objective truth’ in accounting
Which financial statement elements does the IFRS define?
- Revenues, expenses (income statement)
- Assets, liabilities, equity ( balance sheet)
Accrual accounting
Transactions are recorded when they occur, rather than at the time of a cash flow
How do you calculate Net income in accouting terms?
Net income = Cash Flow + Accruals
Accrual accounting means that there is a trade-off due to the next four elements:
- 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?
What are certain incentives to ‘distort’ accounting numbers?
Management compensation
Debt contracts
Why is there a trade-off surrounding management discretion?
Because of the reasons to ‘distort’ accounting numbers
What is a measure to stop discretability of accounting numbers?
The responsibility statement - where management needs to sign the numbers
What are Gaap* measures?
The additional financial measures the management considers relevant for investors.
Where does GAAP stand for?
Generally Accepted Accounting Principles
What is the biggest keytake away of week 1?
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!!
Where do the financial statements analysis looks at and what is it objective?
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
