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ch 1 .pdf - ACCT90002 Financial Statement Analysis Week 1:...

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ACCT90002Financial StatementAnalysisWeek 1: Introduction1
Lecture outlineCourse objectivesCourse requirementsFSA framework2
Lecturer & coordinatorA/Prof dr. Flora KuangEmail: [email protected]Office: L8.063, the SpotTel: 834 498063113-flora-kuangACCT90002 SM2 20213
ACCT90002 SM2 2021Lecturer (Weeks 2-4)Senior Lecturer dr. Qingbo YuanEmail:[email protected]Office: L7.044, the SpotTel: 903 558994
TWO misconceptionsMisconception No. 1Accounting data is factual;Accounting data provides historical information;Accounting data is not forward-looking.Misconception No. 2FSA is formula based; it is about data mining.5
Is accountinginformation factual?6
From business activities to financial statementsKey aspect of FSA:Understanding the influence of the accounting system on thequality of thefinancial statement databeing used in the analyses.7Can You TrustThe Numbers
Can You Trust The Numbers1.Reporting environment (US GAAP vs. IFRS)2.Relevance and limitation of accounting3.The accrual system of accounting4.Managerial incentives over financial reporting8
Reporting environmentA key issue in world accounting is acceptance of the International AccountingReporting Standards and Regulations.We need to understand the background and objectives of the InternationalAccounting Standards Board.We need to recognize the difficulties associated with accepting internationalstandards e.g. US vs. IASB.9
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Relevance of accounting information11Ball & Brown1968
Relevance of accounting information12Note: if you can forecastearnings change 12 monthsearlier with perfect accuracy,you can earn 35.6% annualreturn.
13"Trading strategies thatexploit cross-sectionaldifferences in firms'transitory earningsproduce abnormalreturns of7-to-10%peryear."
Relevance of accounting information14Relation between Accounting Numbers and Stock Prices
General limitations of accounting informationoTimeliness- periodic disclosure, not real-time basisoFrequencyquarterly/half yearly and annuallyoBackward Looking-limitedprospective information15GAAP fully expenses R&Dand advertising/marketingoutlay, but some of themhave future value!Managers have somediscretionoverestimates such as “baddebt expense”.

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