Overview of Accounting Analysis
Chapter 3
Overview of Accounting Analysis
1
Preliminary Topics
• Institutional Framework of Financial Reporting includes: (1) Income Statement, (2) Balance Sheet and (3) Cash Flow Statement. Balance Sheet analysis: Building Blocks of assets, liability, debt & equity. Equity=Assetsliability. Book value vs. market value of share. • Corporate financial report is prepared on accrual basis rather than cash basis. Accrual implies economic activities rather than true payment and receipts. • A Responsibility Delegated to the Management. Management holds the advantage of making the assumption and financial report depends on that assumption. This some times makes the reporting less practical. Accounting analysis is then more valuable.
2
Accounting views
• Assets: Resources owned by the firm that are : – likely to produce future economic benefits – Measurable with a reasonable degree of certainty • Liabilities are economic obligations of a firm arising from benefits received in the past that are: – Required to be met with reasonable degree of certainty – At reasonably well-defined time in the future • Equity is the difference between a firm’s net assets and its liabilities.
3
Accounting views (Contd..)
• Revenues are economic resources earned during a time period. It would be recognized when: – The firm has provided all, or substantially all, the goods and services to be delivered to the customer – The customer has paid cash or is expected to pay cash with reasonable degree of certainty • Expenses are economic resources used up in a time period. It is governed by matching and conservative principles. These are: – Costs directly associated with revenues recognized above – Costs associated with benefits consumed – Resources whose future benefits are uncertain • Profit is the difference between revenue and costs
4
Factors Influencing Accounting Quality
• 1. There are 3 sources of accounting noise: Accounting Rules – Management discretion of accounting
Overview of Accounting Analysis
1
Preliminary Topics
• Institutional Framework of Financial Reporting includes: (1) Income Statement, (2) Balance Sheet and (3) Cash Flow Statement. Balance Sheet analysis: Building Blocks of assets, liability, debt & equity. Equity=Assetsliability. Book value vs. market value of share. • Corporate financial report is prepared on accrual basis rather than cash basis. Accrual implies economic activities rather than true payment and receipts. • A Responsibility Delegated to the Management. Management holds the advantage of making the assumption and financial report depends on that assumption. This some times makes the reporting less practical. Accounting analysis is then more valuable.
2
Accounting views
• Assets: Resources owned by the firm that are : – likely to produce future economic benefits – Measurable with a reasonable degree of certainty • Liabilities are economic obligations of a firm arising from benefits received in the past that are: – Required to be met with reasonable degree of certainty – At reasonably well-defined time in the future • Equity is the difference between a firm’s net assets and its liabilities.
3
Accounting views (Contd..)
• Revenues are economic resources earned during a time period. It would be recognized when: – The firm has provided all, or substantially all, the goods and services to be delivered to the customer – The customer has paid cash or is expected to pay cash with reasonable degree of certainty • Expenses are economic resources used up in a time period. It is governed by matching and conservative principles. These are: – Costs directly associated with revenues recognized above – Costs associated with benefits consumed – Resources whose future benefits are uncertain • Profit is the difference between revenue and costs
4
Factors Influencing Accounting Quality
• 1. There are 3 sources of accounting noise: Accounting Rules – Management discretion of accounting