Financial Statements and Corporate Managers

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Business Analysis and Valuation: IFRS Edition Instructor’s Manual – Discussion Questions Palepu – Healy – Bernard – Peek 2 Instructor 's Manual Dot-Com Crash-3 Instructor’s Manual – Discussion Questions Table of Contents Table of Contents...........................................................................................................3 Chapter 1 A Framework for Business Analysis Using Financial Statements................4 Chapter 2 Strategy Analysis...........................................................................................7 Chapter 3 Overview of Accounting Analysis ..............................................................16 Chapter 4 Implementing Accounting…show more content…
For example, he can assess how much value can be created through acquisition of target company, estimate the stock price of a company considering initial public offering, and predict the likelihood of a firm’s future financial distress. Question 2. Accounting statements rarely report financial performance without error. List three types of errors that can arise in financial reporting. Three types of potential errors in financial reporting include: 1. error introduced by rigidity in accounting rules; 2. random forecast errors; and 4 3. systematic reporting choices made by corporate managers to achieve specific objectives. Accounting Rules. Uniform accounting standards may introduce errors because they restrict management discretion of accounting choice, limiting the opportunity for managers’ superior knowledge to be represented through accounting choice. For example, SFAS No. 2 requires firms to expense all research and development expenditures when they are occurred. Note that some research expenditures have future economic value (thus, to be capitalized) while others do not (thus, to be expensed). SFAS No. 2 does not allow managers, who know the firm better than outsiders, to distinguish between the two types of expenditures. Uniform accounting rules may restrict managers’ discretion, forgo the opportunity to portray the economic reality of firm better and, thus, result in errors. Forecast Errors. Random
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