1-Lecture Notes 1 - Why study financial statements? A...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture notes for AIM 3320- University of Texas at Dallas. 1 Why study financial statements? A security analyst “How well is the firm I am following performing? What is the value of the firm’s stock given my assessment of the firm’s current and future performance?” A loan officer may need to ask: “What is the credit risk involved in lending a certain amount of money to this firm? How well is the firm managing its liquidity and solvency? A management consultant might ask: “What is the structure of the industry in which the firm is operating? What are the strategies pursued by various players in the industry? What is the relative performance of different firms in the industry?” A corporate manager may ask: “Is my firm properly valued by investors? Is our investor communication program adequate to facilitate this process?” A corporate manager could ask: “Is this firm a potential takeover target? How much value can be added if we acquire this firm? How can we finance the acquisition?” • An independent auditor would want to ask: “Are the accounting policies and accrual estimates in this company’s financial statements consistent with my understanding of this business and its recent performance? Do these financial reports communicate the current status and significant risks of the business?”
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Lecture notes for AIM 3320- University of Texas at Dallas. 2 Intuition Financial statement analysis is a valuable activity when managers have complete information on a firm’s strategies and a variety of institutional factors make it unlikely that they fully disclose this information. In this setting outside analysts attempt to create “inside information” from analyzing financial statement data, thereby gaining valuable insights about the firm’s current performance and future prospects. To understand the contribution that financial statement analysis can make -understand the role of financial reporting in the functioning of capital markets -the institutional forces that shape financial statements.
Background image of page 2
Lecture notes for AIM 3320- University of Texas at Dallas. 3 LEMON’S PROBLEM Savings in any economy are widely distributed among households. New entrepreneurs and existing companies that would like to attract savings to fund their business ideas. Matching savings to business investment opportunities is complicated. Why? First, entrepreneurs typically have better information than savers on the value of business investment opportunities. Second, communication by entrepreneurs to investors is not completely credible because investors know entrepreneurs have an incentive to inflate the value of their ideas. Consider a situation where half the business ideas are “good” and the other half are “bad.” If investors cannot distinguish between the two types of business ideas, entrepreneurs with “bad” ideas will try to claim that their ideas are as valuable as the “good” ideas. Realizing this possibility, investors value both
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/04/2008 for the course ACCT 3320 taught by Professor Frankzhang during the Summer '06 term at University of Texas at Dallas, Richardson.

Page1 / 22

1-Lecture Notes 1 - Why study financial statements? A...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online