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Lecture 4 and 5: Recap and Introduction To Accounting Analysis
Lecture 4 and 5: Recap and Introduction To Accounting Analysis
and Introduction to
Accounting Analysis
BITS Pilani By Gaurav Nagpal
Pilani|Dubai|Goa|Hyderabad
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Concepts covered till now
Lemons Problem
Business Analysis, Accounting Analysis, Prospective
Analysis, Financial Analysis
Michael Porter Forces, Value Net Model
Competitive Strategies
Corporate strategies: Directional, Portfolio, Parenting
Capital Turnover Ratio Formula = Net Sales (Cost of Goods Sold) / Capital
Employed
Net Working Capital Turnover Ratio Formula = Net Sales / Net Working Capital
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Accounting Analysis
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Key Concepts
Key Concepts
Various factors influence the quality of accounting-based financial reports.
Managers have some discretion in accounting choices used in financial reporting.
Incentives for the management of financial reporting items must be considered by the
analyst. 16
Accrual Accounting
Revenues are economic resources earned during a period. Expenses are economic
resources used up in a time period.
Revenue Recognition---------Realization Principle
Expense Recognition--------- Conservatism and Matching Principles
Profit= Revenue - Expenses
Assets are economic resources owned by a firm that are likely to produce future
economic benefits and 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 a reasonable degree of certainty and whose timing is
reasonably well-defined.
Assets= Liability + Equity
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Which assets to be recorded at fair values and which ones at historical cost?
– Marketable securities are required to be valued at fair values
How to record unrealized gains and losses from using fair values?
– If marketable securities are not held for hedging purposes, unrealized gains and
losses to be included in net income
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One-Size-Fits-All Problem
Accounting standards often specify uniform accounting for all firms (one size fits all). The fit between accounting
standards and the nature of the firms transactions may introduce some distortion in the reported financial statements.
Example: required expensing of R&D expenditures.
Forecast Errors
Accrual accounting requires that management make a host of forward-looking estimates. These estimates are inevitably
inaccurate because management doesn’t have perfect foresight of the future. Example: estimate of future bad-debts
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https://www.youtube.com/watch?v=QKzOye2axdM
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