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Unformatted text preview: Implementing Accounting Analysis Implementing Accounting Analysis ¡ Two Steps ¢ 1. Recast Financial Statements ¡ Facilitates comparisons across firms and for the same firm over time ¢ 2. Identify Distortions ¡ Business strategy analysis helped us identify the firm’s key success factors and risks Implementing Accounting Analysis Cont’d ¡ Q. How do the firm’s accounting policies and estimates compare with those of other firms in the industry? ¢ Are there good reasons for differences? Or Do they result from management judgments or bias? ¡ Q. Are the accounting rules inadequate for measuring the underlying economic reality? Implementing Accounting Analysis Cont’d ¡ A. Asset Distortions ¢ Resources owned or controlled by the firm as a result of past transactions, which are expected to generate future economic benefits that can be measured with a reasonable degree of certainty ¡ Distortions arise because it is unclear whether ¢ Ownership is certain ¢ Measurement issues Implementing Accounting Analysis Cont’d ¡ B. Liability Distortions ¢ Economic obligations arising from receiving benefits in the past, and which have to be settled in the future and amount and timing is reasonably certain ¢ Distortions arise because it is unclear whether ¡ An obligation has been incurred ¡ The obligation can not be measured ¡ Changes in the value of debt Implementing Accounting Analysis Cont’d ¡ C. Equity Distortions ¢ Residual claim on firm’s assets, after paying liabilities ¢ Asset & Liabilities distortions cause equity distortions Two other forms of equity distortions ¡ Hybrid Securities ¡ Stock option expense A. Ownership ¡ What resources for a firm are excluded from its balance sheet because ownership of resulting benefits is uncertain?...
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This note was uploaded on 09/10/2008 for the course ACCT 101 taught by Professor Goh during the Spring '02 term at Nanyang Technological University.
- Spring '02