ICE 303 Chapter 2 Suggested Answers to Selected End of Chap

ICE 303 Chapter 2 Suggested Answers to Selected End of...

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Lecture 2 Answers to End of Chapter Questions 2-2. The Sarbanes-Oxley Act of 2002 (SOX) established the Public Company Accounting Oversight Board (PCAOB), which effectively gives the SEC authority to oversee the accounting profession’s activities. Possible shortcomings of relying solely on financial statement analysis include: If a company is in multiple lines of business it may be difficult to make comparisons The accounting data may not be accurate Average performance may not be a good measure, especially if the industry is in a slump It is possible to manipulate accounting numbers. 2-3. Data on a company’s performance over a reporting period: income statement, statement of cash flows, statement of retained earnings (how much additional retained earnings will be added to existing retained earnings). Data on a company’s performance about the company’s current position: balance sheet. Notes to the financial statements contain details about the composition and cost of the company’s debt, any liabilities such as lawsuits that are still pending, revenue recognition, taxes, significant clients, detailed breakdowns of fixed asset accounts, executive compensation, and descriptions of employee benefit plans. An example of a situation in which the notes would be essential to valuation would be a company that relied on a few clients, rather than a wide base of clients. The notes would detail current and expected revenue from those clients and how that revenue would be recognized. An analyst would need this information to develop a set of cash flows for the company which would provide the basis of a company valuation. 2-4. An analyst looking at granting a loan request would be most interested in the company’s balance sheet which she could use to compute liquidity ratios (current and quick ratios) and debt ratios. A credit analyst would also want an income statement with EBIT and interest with which to compute times interest earned. Times interest earned is a measure
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This note was uploaded on 03/18/2008 for the course ICE 303 taught by Professor Roberts during the Spring '08 term at UVA.

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ICE 303 Chapter 2 Suggested Answers to Selected End of...

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