Week 1 Flashcards
Financial statements
used to assist business analysis and decision making
> managers: use to monitor performance, communicate with external investors
> security analyst use them to rate and value companies
4 key components
> Business strategy: provides foundation for subsequent analysis
Accounting analysis: how well do acc rules and conventions represent a firm’s economic reality
Financial analysis: financial ratios compared to competitors and historical performance
Prospective analysis: forecasting financial statements for use in valuation
Role of financial statements
> Provide the most widely available source of data on the economic activities of public corporations
Investors rely on financial reports to assess the plans and performances
Role of financial reporting
> allocation of savings to investment opportunities is critical to prosperity
would like to attract these savings to fund their business ideas
Role of Intermediaries
> help prevent a market break-down
> both add value by helping investors distinguish between good and bad investment opportunities
Information intermediaries
> auditors, financial analysts: focus on providing information to investors
add value by helping investors distinguish between good and bad investment
Financial intermediariees
> venture capital firms, banks: analyse alternative investment proposals
rely on information in financial statements
Business activities
> Value is created when a firm earns more than its cost of capital
financial statement are influenced by firms business activities and account system
2 key factors, business activities
> Economic environment: firm’s industry regulations under which it operates
Own business strategy: determines how the firm positions itself within its environment to achieve a competitive advantage
Influence of accounting system: Accrual accounting
> net income is the primary periodic performance measure
> manager may have incentives to distort reported profits because they are used to measure management’s performance
Influence of accounting system: Accounting standards and auditing
> acc standards limit the potential distortions that managers can introduce
Increase uniformity reduces managers flexibility
Influence of accounting system: Managers reporting strategy
> managers choose a accounting and disclosure policies that make it more or less difficult for external users to understand the true economic picture of the business
Strategy analysis
> Purpose: identify key profit drivers, key business risks and assess profit potential
Involves: industry analysis and analysis of firm’s strategy to create a sustainable competitive advantage
Accounting Analysis
> Purpose: how a firm’s accounting captures its underlying business reality
Involves: identify where there is a accounting flexibility
Improves financial analysis
Financial analysis
> Purp: evaluate current and past performance
Skills: should be systematic and efficient
tools: cash flow analysis, ratio analysis
