7. Analysis of published financial statements Flashcards
(17 cards)
What does company analysis include?
Overview of the company: mission statement, structure, goals
Analysis of competitive strategies: low cost approach, USP’s
Analysis of financial statements: trend analysis, ratio analysis
Analysis of assets, liabilities and earnings
Forms of creative accounting
Off balance sheet financing
Cut off manipulation
Window dressing
Change of accounting policies
Manipulation of accruals, prepayments and contingencies
Types of trend analysis
Horizontal = compare lines over multiple time periods
Vertical = proportional analysis as % of base item
When is trend analysis helpful?
Analysing revenue patterns
Impact of one off expenditure
Financial projections
Comparing multiple co in the same industry
Types of fundamental analysis?
Interest rates, production, earnings, GDP
Combination of qualitative and quantitative
Objectives = value co, evaluate performance, intrinsic value, benchmark
Economic
Industry
Company
What does economic analysis include?
GDP, interest rates, employment
4 economic business cycles
Recovery (expansion)
Boom (peak)
Recession (contraction)
Depression (trough)
What is industry analysis and its stages?
Evaluation of strengths and weaknesses in industry
Stages
Pioneer stage
Expansion stage
Stagnation stage
Decay stage
In industry analysis what are the underlying forces that drive the industry?
Porters 5 forces
Barriers to entry
Bargaining power of customers
Bargaining power of suppliers
Availability of substitute goods
Competitors and nature of competion
What are the key to measuring to determine the financial strength of a company?
Profitability
Growth potential of company
Overall financial position and solvency
Comparative position to competitors
Trend of achievements
What are the limitations of ratio analysis
Final conclusions cannot be drawn
Trend is a reflection of historical info may not be applicable in the future
Benchmark for financial analysis not always appropriate
May be window dressing to manipulate financial statemements
How is fraud split?
Fraudulent financial reporting (intentional)
Misappropriation of assets (theft)
What are errors and examples
Unintentional misstatement in fs
Examples
Mistake in processing data
Incorrect accounting estimate
Mistake in app of principles
What is fraudulent financial reporting?
Severe type of accounting irregularity
Manipulation, falsification, misrep, misapp of principles
What is misappropriation of assets?
Theft of assets
Tangible and intangible assets
Embezzling receipts
Payment for non existent purchases
What is creative accounting?
Deliberate manipulation of figures
Main reason is due to effect it will have on share price
Key aspect of improving appearance is keeping gearing as low as possible
Regulations to prevent creative accounting
IAS 27 (consolidation)
IFRS 16 (lease)
IAS 37 (provisions, contingent liabilities and contingent assets)
