财务报表分析与证券估值英文课件 (18)
财务报表分析 英文ppt课件
By ledger, complete P&L and B/S forecast by month
Includes Cost of Quality, Cost Savings and Economics projections
Final Results
Versus Versus Versus Versus While While
Current Profit Increase Current Profit Increase Increase Of Return On Investment Increase Liquidity Minimizing Capital Expenditures The Day-to-day Business Needs
($0.2) $0.5 $0.0 $0.5 $0.8 -0.8%
Other Inc/Exp Admin / Cap Charge
($2.0) ($4.0)
($1.8) ($4.0)
($0.2) $0.0
Operating Profit ROS %
$39.0 15.6%
$37.1 15.3%
$1.9 0.3%
N Tax Manager
North Asia
O Tax Manager
India
P Director of Finance North Asia (Team of 5)
Q Country Controller
India (Team of 5)
R Finance Manager (20%)
Taiwan
S Tax Manager Asia Pacific
财务分析报告英文版ppt课件
Current Assets： Monetary capital Notes receivable Accounts receivable Advance payment Accounts receivable-others
Inventory Current assets-others
Total current assets Non-current assets： Equity investment-long term Investment Property
The company's brand to borrow Jacques realize from "low voltage electrical supplier" to "solution provider" change, so as to get higher gross margin and wide development space, the realization enterprise of in-depth development.
17.83% 0.48% 0.09% 18.41% 43.10%
12.03% 28.24% 2.98% 11.83% 55.06% 1.84%
56.90%8
100.00%
In 2011, the non-current liabilities item of company is the proportion of the 2010’s increase obviously, mainly because the company in 2011 to raise funds for company executed bonds issue 1.5 billion Yuan.
财务报表分析(英文版)
A. Measuring Business Incomea. explain why financial statements are prepared at the end of the regular accounting period.Major Financial Statements:∙The balance sheet: provides a "snapshot" of the firm's financial condition.∙The income statement: reports on the "performance" of the firm.∙The statement of cash flows: reports the cash receipts and cash outflows classified according to operating, investment and financing activities.∙The statement of stockholder's equity: reports the amounts and sources of changes in equity from transactions with owners.∙The footnotes of the financial statements: allow uses to improve assessment of the amount, timing and uncertainty of the estimates reported in the financial statements.The most accurate way to measure the results of enterprise activity would be to measure them at the time of the enterprise's eventual liquidation. Business, government, investors, and various other user groups, however, cannot wait indefinitely for such information. If accountants did not provide financial information periodically, someone else would.The periodicity or time period assumption simply implies that the economic activities of an enterprise can be divided into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly.The information must be reliable and relevant. This requires that information must be consistent and comparable over time and also be provided on a timely basis. The shorter the time period, the more difficult it becomes to determine the proper net income for the period. A month's results are usually less reliable than a quarter's results, and a quarter's results are likely to be less reliable than a year's results. Investors desire and demand that information be quickly processed and disseminated; yet the quicker the information is released, the more it is subject to error. This phenomenon provides an interesting example of the trade-off between relevance and reliability in preparing financial data.In practice, financial reporting is done at the end of the accounting period.Accounting periods can be any length in time. Firms typically use the year as the primary accounting period. The 12-month accounting period is referred to as the fiscal year. Firms also report for periods less than a year(e.g. quarterly) on an interim basis.∙Accounting period must be of equal length. Financial statements are prepared at the end of the regular accounting period to allow comparison across time.User CommentsPosted by Jeanette @ 2003-10-25 14:15:45.same period --- allow comparisionbasic assumption in preparing financial statements is ---- the firm will continue in operation,--- going concern,'assigning revenue - expenses ---- base on matching principlePosted by GiGi @ 2004-01-29 06:25:01.remember that there are 4 types of financial statementsb. explain why the accounts must be adjusted at the end of each period.Why?∙Most external transactions are recorded when they occur. The employment of an accrual system means that numerous adjustments are necessary before financial statements are prepared because certain accounts are not accurately stated.∙Some external transactions might not even seem like transactions and are recognized only at the end of the accounting period. Examples include unrecorded revenues and credit purchase.∙Some economic activities do not occur as the result of external transactions. Examples include depreciation and the expiration of prepaid expenses.∙Timing: Often a transaction affects the revenue or expenses of two or more accounting periods. The related cash inflow or outflow does not always coincide with the period in which these revenue or expense items are recorded. Thus, the need for adjusting entries results from timing differences between the receipt or disbursement of cash and the recording of revenue or expenses. For example, if we handle transactions on a cash basis, only cash transactions during the year are recorded. Consequently, if a company's employees are paid every two weeks and the end of an accounting period occurs in the middle of these two weeks, neither liability nor expense has been recorded for the last week. To bring the accounts up to date for the preparation of financial statements, both the wage expense and the wage liability accounts need to be increased.A necessary step in the accounting process, then, is the adjustment of all accounts to an accrual basis and their subsequent posting to the general ledger.Adjusting entries are therefore necessary to achieve a proper matching of revenues and expenses in the determination of net income for the current period and to achieve an accurate statement of the assets and equities existing at the end of the period.Adjustment principles∙The revenue recognition principle∙The matching principleWhat to adjust?Each adjusting entry affects both a real account (assets, liability, or owner's equity) and a nominal or income statement account (revenue or expense). The four basic types of adjusting entries are:1.deferred expenses that benefits more than one period: for example,prepaid expenses (e.g. prepaid insurance, rent) are expenses paid in advance and recorded as assets before they are used or consumed.When these assets are consumed, expenses should be recognized: a debit to an expense account and a credit to an asset account. Another example is depreciation. The cost of a long-term asset is allocated as anexpense over its useful life. At the end of each period depreciation expense is recorded through an adjusting entry: a debit to a depreciation expense account and a credit to an accumulated depreciation account (a contra account used to total the past depreciation expenses on specific long-term assets).2.accrued expenses that incurred but not yet paid or recorded: examplesare employee salaries and interest on borrowed money. At the end of the accounting period, the accrued expense is recorded through an adjusting entry: a debit to an expense account (i.e. Salaries Expense) and a credit to a liability account (i.e. Salaries Payable).3.accrued revenues that earned but not yet received or recorded: also calledunrecorded revenues. Examples include interest revenues, rent revenues, etc. Such revenues accumulate with the passing of time, but the firm may have not received the payment or billed the client. An adjusting entry should be: a debit to an asset account (i.e. Accounts Receivable) and a credit to a revenue account (i.e. Interest Revenue).4.unearned revenues that are revenues received in cash before delivery ofgoods/services: examples are magazine subscription fees, customer deposits for services. These "revenues" are not earned yet and thus should be recorded as liabilities. An adjusting entry should be: a debit to a liability account (i.e. Unearned Revenue) and a credit to a revenue account (i.e. Revenue).User CommentsPosted by GiGi @ 2004-01-29 06:26:22.accrual system!!! definitionPosted by Gina @ 2004-02-03 22:17:33.accrual based accounting recognizes the impact of a business event as it occurs, regardless of whether transaction affected cashPosted by Gina @ 2004-02-03 22:20:20.Revenue Principle: basis for recording revenues (ie tells when to record revenue and the amounts).Matching Principle: basis for recording expensis (ie direction to ID all expenses during the period, measure them, and match them against the revenues earned in that period).c. explain why the accrual basis of accounting produces more useful income statements and balance sheets than the cash basis.Revenue is something earned through the sale of goods or services. Not all cash receipts are revenues; for example, cash received through a loan is not revenue. Expenses are the cost of goods or services used to generate revenues. Not all cash payments are expenses; for example, cash dividends paid to stockholders are not expenses. Net income is the difference between revenues and expenses. It is reported on the income statement, and is the focus in evaluating a firm's profitability.Most companies use the accrual basis accounting, recognizing revenue when it is earned (the goods are sold or the services performed) and recognizing expenses in the period incurred, without regard to the time of receipt or payment of cash. Net income is revenue earned minus expenses incurred.Under the strict cash basis accounting, revenue is recorded only when the cash is received and expenses are recorded only when the cash is paid. Net income is cash revenue minus cash expenses. The matching principle is ignored here, resulting inconformity with generally accepted accounting principles.Today's economy is considerably more lubricated by credit than by cash. And the accrual basis, not the cash basis, recognizes all aspects of the credit phenomenon. Investors, creditors, and other decision makers seek timely information about an enterprise's future cash flows. Accrual basis accounting provides this information by reporting the cash inflows and outflows associated with earnings activities as soon as these cash flows can be estimated with an acceptable degree of certainty. Receivables and payables are forecasters of future cash inflows and outflows. In other words, accrual basis accounting aids in predicting future cash flows by reporting transactions and other events with cash consequences at the time the transactions and events occur, rather than when the cash is received and paid. Accrual accounting generally provides a better indication of performance than cash basis of accounting since it increases the comparability of income statements and balance sheets across periods.B. Financial Reporting and Analysisa. define each asset and liability category on the balance sheet and prepare a classified balance sheet.Think of the balance sheet as a photo of the business at a specific point in time. It presents the assets, liabilities, and the equity ownership of a business entity as of a specific date.∙Assets are the economic resources controlled by the firm.∙Liabilities are the financial obligations that the firm must fulfill in the future.Liabilities are typically fulfilled by payment of cash. They represent the source of financing provided to the firm by the creditors.∙Equity Ownership is the owner's investments and the total earnings retained from the commencement of the firm. Equity represents the source of financing provided to the firm by the owners.Balance sheet accounts are classified so that similar items are grouped together to arrive at significant subtotals. Furthermore, the material is arranged so that important relationships are shown.The table below indicates the general format of balance sheet presentation: Balance Sheet ClassificationsAssets Liabilities and Owner's EquityCurrent Assets Current liabilitiesLong-term investments Long-term debtProperty, plan and equipment Owner's equityIntangible assets Capital stockOther assets Additional paid-in capitalRetained earningsCurrent Assets:They are cash and other assets expected to be converted into cash, sold, or consumed either in one year or in the operating cycle, whichever is longer. The operating cycle is the average time between the acquisition of materials and supplies and the realization of cash through sales of the product for which the materials and supplies were acquired. The cycle operates from cash through inventory, production, and receivables back to cash. Where there are several operating cycles within one year, the one-year period is used. If the operating cycle is more than one year, the longer period is used.Current assets are presented in the balance sheet in order of liquidity. The five major items found in the current asset section are:∙Cash:valued at its stated value. Cash restricted for purpose other than payment of current obligations or for use in current operations should be excluded from the current asset section.∙Marketable securities: Also referred to as marketable securities. Valued at cost or lower of cost and market.∙Accounts receivables:amounts owed to the firm by its customers for goods and services delivered. Valued at the estimated amount collectible.∙Inventories: Products that will be sold in the normal course of business.∙Prepaid expenses: they are expenditures already made for benefits (usually services) to be received within one year or the operating cycle, whichever is longer. Typical examples are prepaid rent, advertising, taxes, insurance policy, and office or operating supplies. They are reported at the amount of un-expired or unconsumed cost.Long-Term Investments:Often referred to simply as investments, they are to be held for many years, and are not acquired with the intention of disposing of them in the near future.∙Investments in securities such as bonds, common stock, or long-term notes that management does not intend to sell within one year.∙Investments in tangible fixed assets not currently used in operations, such as land held for speculation.∙Investments set aside in special funds such as a sinking fund, pension fund, or plant expansion fund. The cash surrender value of life insurance is included here.∙Investments in non-consolidated subsidiaries or affiliated companies. Property, Plant, and Equipment:They are properties of a durable nature used in the regular operations of the business. With the exception of land, most assets are either depreciable (such as building) or consumable.Intangible Assets:They lack physical substance and usually have a high degree of uncertainty concerning their future benefits. They include patents, copyrights, franchises, goodwill, trademarks, trade names, secret processes, and organization costs. Generally, all of these intangibles are written off (amortized) to expense over 5 to 40 years.Other Assets:They vary widely in practice. Examples include deferred charges (long-term prepaid expenses), non-current receivables, intangible assets, assets in special funds, and advances to subsidiaries.Current Liabilities:They are obligations that are reasonably expected to be liquidated either through the use of current assets or the creation of other current liabilities within one year or within the operating cycle, whichever is longer. They are not reported in any consistent order. A typical order is: Notes payable, accounts payable, accrued items (e.g. accrued warranty costs, compensation and benefits) income taxes payable, current maturities of long-term debt, etc.The excess of total current assets over total current liabilities is referred to as working capital. It represents the net amount of a company's relatively liquid resources; that is, it is the liquid buffer, or margin of safety, available to meet the financial demands of the operating cycle.Long-Term LiabilitiesThey are obligations that are not reasonably expected to be liquidated within the normal operating cycle but, instead, at some date beyond that time. Bonds payable, notes payable, deferred income taxes, lease obligations, and pensionobligations are the most common long-term liabilities. Generally they are of three types:∙Obligations arising from specific financing situations, such as issuance of bonds, long-term lease obligations, and long-term notes payable.∙Obligations arising from the ordinary operations of the enterprise such as pension obligations and deferred income tax liabilities.∙Obligations that are dependent upon the occurrence or non-occurrence of one or more future events to confirm the amount payable, or the payee, or the date payable, such as service or product warranties and other contingencies.Owner's Equity:The complexity of capital stock agreements and the various restrictions on residual equity imposed by state corporation laws, liability agreements, and boards of directors make the owner's equity section one of the most difficult sections to prepare and understand. The section is usually divided into three parts:∙Capital stock: the par or stated value of the shares issued.∙Additional paid-in capital: the excess of amounts paid in over the par or stated value.∙Retained earnings: the corporation's undistributed earnings.b. define each component of a multi-step income statement and prepare a multi-step income statement.The income statement measures the success of business operations for a given period of time. A single-step income statement groups revenues together and expenses together, without further classifying each of the groups. A multi-step income statement makes further classifications to provide additional important revenue and expense data. These classifications make the income statement more informative and useful. It is recommended because:∙it recognizes a separation of operating transactions from non-operating transactions;∙it matches costs and expenses with related revenues;∙it highlights certain intermediate components of income that are used for the computation of ratios used to assess the performance of the enterprise.Components:∙Operating section: a report of the revenues and expenses of the company's principal operations.o Sales or revenue section: a subsection presenting sales, discounts, allowances, returns, and other related information, and to arrive atthe net amount of sales revenue.o Cost of goods sold section:a subsection that shows the cost of goods that were sold to product the sales.o Selling expense: a subsection that lists expenses resulting from the company's efforts to make sales.o Administrative or general expenses: a subsection reporting expenses of general administration.Non-operating section: a report of revenues and expenses resulting from secondary or auxiliary activities of the company. In addition, special gains and losses that are infrequent or unusual, but not both, are normally reported in this section. Generally these items break down into two main subsections:o Other revenues and gains: A list of the revenues earned or gains incurred, generally net of related expenses, from non-operatingtransactions.o Other expenses and losses: A list of the expenses or losses incurred, generally net of any related incomes, from non-operatingtransactions.∙Income taxes: A short section reporting federal and state taxes levied on income from continuing operations.∙Discontinued operations: material gains or losses resulting from the disposition of a segment of the business.∙Extraordinary items: Unusual AND infrequent material gains and losses.∙Cumulative effect of a change in accounting principle.∙Earnings per share.C. Short-Term Liquid Assetsa. describe how to choose the appropriate accounting method for investment securities and explain how fair (market) value gains and losses on such investments are reported.Short-term investments, also called marketable securities,ordinarily consist of short-term paper (certificates of deposit, treasury bills, and commercial paper), marketable debt securities (government and corporate bonds), and marketable equity securities (preferred and common stock) acquired with cash not immediately needed in operations.They must be:∙readily marketable: can be sold quite easily.∙intended to be converted into cash as needed within one year or the operating cycle, whichever is longer.Securities that are intended to be held for more than one year are called long-term investments.There are two types of gains and losses:∙Realized gains and losses: the difference between the fair market value and the cost of the securities when they are sold.∙Unrealized holding gains and losses:the difference between the fair market value and the cost of the securities when they are still held by the firm. The gains and losses are unrealized because securities have not been sold.In general:∙When securities are purchased, they are recorded at cost. The cost of the securities includes purchase price and any broker's fees or fees paid to acquire securities.∙Interest and dividends generally are recognized as revenue when they are received.∙When securities are sold, the cost is compared to the sales price, and the difference is recorded as a gain or a loss.∙At the end of each accounting period, the balance of the controlling account is adjusted to reflect the current market value of the securities owned.However, different categories of investment securities have different treatment on unrealized holding gains and losses.∙Held-to-maturity securities:Debt securities that management intends to hold to their maturity date. At year end, they are reported at cost adjusted for the effect of interest (debit the securities account and credit interest income account), and unrealized holding gains and losses are not recognized.Trading securities: Debt and equity securities bought and held mainly for sale in the near term to generate income on price changes. At year end, they are reported at their fair market value. Any unrealized holding gains or losses are recognized on the firm's income statement as part of the net income. When they are sold, the realized gains or losses will also appear on the income statement. Realized gains and losses are not affected by any unrealized gains or losses recognized before.Example:1.12/1/2002, 100 shares purchased at $80 per share for tradingpurposes:Entry: Trading Securities 8000(Debit) | Cash 8000 (Credit)2.12/31/2002, the price is $60 per share.Entry: Unrealized Loss on Investments 2000 (Debit) | Allowance to Adjust Short-Term Investments to Market 2000 (Credit).The allowance account is shown on the balance sheet as a contra-asset account:Trading Securities (at cost) 8000Allowance Account (2000)Trading Securities (at market) 6000The $2000 unrealized loss is reported in the income statement for 2002.3.06/12/2003, 100 shares sold at $120 per share.Entry: Cash 12000 (Debit) | Trading Securities 8000 (Credit) | Realized Gain on Investment 4000 (Credit)The $4000 realized gain is reported in the income statement of 2003.Available-for-sale securities:Debt and equity securities not classified as held-to-maturity or trading securities. The unrealized gains and losses are reported in the balance sheet as an adjustment to the shareholders' equity (in contrast, the unrealized gains or losses of trading securities are reported in the income statement as part of the net income). Other than that, they are accounted for in the same way as trading securities. Example:1.12/1/2002, 100 shares purchased at $80 per share for tradingpurposes:Entry: Available-for-Sale Securities 8000(Debit) | Cash 8000 (Credit)2.12/31/2002, the price is $60 per share.Entry: Unrealized Loss on Investments 2000 - Equity (Debit) | Allowance to Adjust Short-Term Investments to Market 2000 (Credit).The allowance account is shown on the balance sheet as a contra-asset account:Available-for-Sale Securities (at cost) 8000Allowance Account (2000)Available-for-Sale Securities (at market) 6000The $2000 unrealized loss is reported in the balance sheet for 2002 as a component of stockholder's equity.3.06/12/2003, 100 shares sold at $120 per share.Entry: Cash 12000 (Debit) | Trading Securities 8000 (Credit) | Realized Gain on Investment 4000 (Credit)The $4000 realized gain is reported in the income statement of 2003. User CommentsPosted by shasha @ 2003-11-15 04:02:09.AFS (available-for-sale) is kind of short-term investment, however, its market value change should be adjusted to the equity as well.Posted by Gina @ 2004-02-12 01:51:11.AFS can be short or long-term. Since they are reported on the balance sheet at market value, this reporting needs to be adjusted from their last carrying amount to current market value.The unrealized gain or loss is reported in 2 places:(1) Income statement - under 'Other comprehensive income' (net of tax) [but not as part of net income];(2) OE - prehensive income - unrealized gain on investments (net of tax).善待自己，学会放弃，得而不喜，失而不烦，弃而不悔，多一份执着和自信，添一份洒脱和从容，才是潇洒快乐的人生！善待自己，学会原谅。
《财务报表分析英》幻灯片PPT
Interest Expensee
59 officers’ salaries, etc.
EBT f
$ 151 d. Operating income.
Income Taxes EATg
Cash Dividends 6-9Increase in RE
60 e. Cost of borrowed funds. $ 91 f. Taxable income.
Cost of Goods Sold b 1,599 over a time period.
Gross Profit $ 612 b. Received, or receivable,
SG&A Expenses c
402 from customers.
EBITd
$ 210 c. Sales comm., adv.,
1. Analysis of the funds needs of the firm.
Financial Ratios
2. Analysis of the financial condition and profitability of the firm.
1. Individually 2. Over time
IncomeqeuiStyt.atement
A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period.
6-6
Basket Wonders’
6-3
Examples of External Uses of Statement Analysis
财务报表分析与证券估值_英文PPT (4)
The Big Picture in This Chapter
• A valuation model is a method of accounting for value • Discounted cash flow (DCF) valuation employs cash accounting for valuation • DCF Valuation – and cash accounting for value – does not work • Move to accrual accounting for value in Chapters 5 and 6
• Why “cash flows in investing activities” reported in U.S. and IFRS financial statements does not measure cash investment in operations correctly
• How accrual accounting for operations differs from cash accounting for operations • The difference between earnings and cash flow from operations • The difference between earnings and free cash flow • How accruals and the accounting for investment affect the balance sheet as well as the income statement • Why analysts forecast earnings rather than cash flows
财务分析与证券定价英文chapter1.ppt
different from current ROCE?
This chapter analyzes current profitability The next chapter analyzes growth
Forecasting and the Analysis of Current Profitability
1. Establish the present: Analysis of profitability (in this chapter)
Determine the current profitability (ROCE) and the factors that influence the profitability
4%
SPREAD = 1%
2%
SPREAD = 0%
0%
SPREAD = -1%
-2%
SPREAD = -2%
-4%
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
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FLEV
RO CE = RN O A + [FLEV x SPREAD]
Financial Leverage: General Mills, Inc.
Chapter 11
The Analysis of Profitability
Links
Link to Previous Chapters
Chapters 8, 9 and 10 reformulated the financial statements to prepare them for
财务报表分析与证券定价 (18)
The Analysis of Equity Risk and the Cost of Capital
The Analysis of Equity Risk and the Cost of Capital
Link to Previous Chapters Chapter 3 reviewed standard beta technologies to measure the cost of capital. Chapter 13 distinguished operating risk and financing risk.
This Chapter This chapter analyzes the fundamental determinants of operating and financing risk in equity investing. It also introduces price risk and outlines ways to incorporate risk when valuing firms and trading in their shares.
What are the problems with standard beta technologies? What are the fundamental determinants of risk? What is price risk? How is risk incorporated in valuation?
The Nature of Risk
• Value is determined by expected payoffs discounted for risk • Risk is determined by the likelihood of getting payoffs that are different from the expected payoff • Risk is characterized by the set of possible outcomes that an investor faces and the probabilities of these outcomes: a payoff (or return) distribution
财务报表分析英文PPT课件
6-4
Examples of Internal Uses of Statement Analysis
Plan -- Focus on assessing the current financial position and evaluating potential firm opportunities. Control -- Focus on return on investment for various assets and asset efficiency. Understand -- Focus on understanding how suppliers of funds analyze the firm.
6-1
Carroll College, Waukesha, WI
After studying Chapter 6,
you should be able to:
Understand the purpose of basic financial statements and their contents.
6-3
Examples of External Uses of Statement Analysis
Trade Creditors -- Focus on the liquidity of the firm.
Bondholders -- Focus on the long-term cash flow of the firm.
Analyze a firm’s return on investment (i.e., “earning power”) and return on equity using a DuPont approach.
财务报表分析与证券定价Stephen H Penman-PPT精品文档
Chapter 13 Page 422 Exhibit 13.1
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Reebok 1,135 720 415 34 381
收入余值预 测组成
分析师的收入预测 2019 收入预测 减NFE 预测值 (NFO x Core NBC) 减少数股东权益 分析师隐含 OI预测 计算剩余收入成份: 营业收入余值 (ReOI)预测 Nike: 656 (0.110 x 2,659) Reebok: 187 (0.101 x 1,135) 净财务费用余值 (ReNFE) 预测 Nike: 8 (0.035 x 228) Reebok: 29 (0.040 x 720)
可交易权益证券 (市价)
长期负债 (NFO)
普通股东权益(CSE ) NOA 23.4 20.3
15.7 23.4
13.3 20.3
w i n 2 0 0 2 A l l r i g h t s r e s e r v e d . 财 经 易 文E
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利息指出: 0.10 x 7.0 净收入
1.2 1.9 3.1 (0.7) 2.4
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“Hard”
“Soft”
• So a change in OI0 must also change NOA0 by the same amount
• So future RNOA1= OI1/NOA0 must be reduced:
üDenominator effect üNumerator effect
5. Disclosure quality: are disclosures adequate to analyze the business?
a. Disclosures that distinguish operating items from a financial items in the statements
How Accounting Manipulation Leaves a Trail in the Balance Sheet (1)
How Accounting Manipulation Leaves a Trail in the Balance Sheet (2)
The Case of No Growth with Income Shifting
Manipulation has the following effects:
• As RNOA0= OI0/NOA-1, manipulation involves adjusting current operating income, OI0
• But OI0 = Free Cash Flow0 + DNOA0
2. Banking income for the future
ü Decrease current revenue
ü Increase current expenses
Distinguish:
ü
ü
Conservative Accounting vs.
Liberal Accounting
ü Aggressive Accounting
vs. ü Big Bath Accounting
Both increase current NOA Both reduce current NOA
A matter of Accounting Policy A matter of short-term application of accounting that will reverse
Telecommunications Technological change: quality of depreciation allowances
Flash Points: Accounting Areas where Manipulation is More Likely
Induபைடு நூலகம்try
Flash Point
Retailing
Credit losses: quality of net accounts receivable Inventory obsolescence: quality of carrying values of inventory Rebate programs: quantity of sales and estimated liabilities
statements • How quality scoring works
The Big Picture for this Chapter
Accounting quality analysis establishes the integrity of the accounting used for forecasting
Computer hardware Technological change: quality of receivables and inventory
Computer software Marketability of products: quality of capitalized research and development Revenue recognition: quality of receivables and deferred revenue
Manufacturing
Warranties: quality of warranty liabilities Product liability: quality of estimated liabilities
Automobiles
Overcapacity: quality of depreciation allowances
manipulate reports?
4. Transaction quality: is the firm manipulating business to accommodate
the accounting?
a. Transaction timing b. Transaction structuring
• Understand the business • Understand the accounting policy • Understand the business areas where accounting quality is
most doubtful • Understand situations in which management are
Nir Yehuda – Northwestern University Mingcherng Deng – University of Minnesota Peter D. Easton and Gregory A. Sommers – Notre Dame and Southern Methodist
One trail:
A further trail:
“Hard”
“Soft”
Capitalization Quality
Accrual Quality
Low Quality Accounting and RNOA
For valuation, the analyst wants to forecast future RNOA. If there is manipulation, current RNOA cannot be maintained in the future.
The Case of Growth with Income Shifting
Two Directions for Manipulation
1. Borrowing income from the future
ü Increase in current revenue
ü Decrease in current expenses
Equipment leasing Lease values: quality of carrying values for leases
Tobacco
Liabilities for health effects of smoking: quality of estimated liabilities
Pharmaceuticals
R&D: quality of R&D expenditures Product liability: quality of estimated liabilities
Real estate
Property values: quality of carrying values for real property
particularly tempted to manipulate
Flash Points: Accounting Areas where Manipulation is More Likely
Industry
Flash Point
Banking
Credit losses: quality of loan loss provisions
Five Questions About Accounting Quality
1. GAAP quality: is GAAP accounting deficient? 2. Audit quality: is the firm violating GAAP or committing outright fraud? 3. GAAP application quality: is the firm using GAAP accounting to
How income shifting works:
• Accounting methods can be applied to ü borrow income from the future ü push income from the present to the future
• But, this income shifting leaves a trail that can be followed by the quality analyst
• What “quality of earnings” means. • The accounting devices that management can use to manipulate
earnings • How firm can time transactions to determine their earnings • What disclosure quality means • Situations where accounting manipulation is more likely • Why change in net operating assets is the focus of a quality analysis • How diagnostics are developed to detect manipulation in financial