Topic 2

Question 1

Julie, an accounting major, states: ‘Strategy analysis seems to be an unnecessary detour in doing financial statement analysis. Why can’t we just get straight to the accounting issues?’

Explain to Julie why she may be wrong.

Answer 1

. Strategy helps the analyst understand the economics of a firm and the industry in which the firm competes
. provides context for the choice of the firms accounting policies
. Highlights what drives drives profits and what is considered to be risky
. Helps to understand the firms financial policy to determine if it makes sense

Question 2

What are the critical drivers of industry profitability?

Answer 2

. Rivalry amongst firms
. Threat of new entrants
. Substitutes
. Bargaining power of suppliers
. Bargaining power of suppliers