1. Discuss the two distinct approaches to financial statement analysis, and the
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Question
1. Discuss the two distinct approaches to financial statement analysis, and the three ways corporations can use financial reporting as a means to enhance value.
2. Discuss the new SEC rules that went into effect in the early 2000s, and its effect on Interpublic’s financial reporting.
3. Explain the term impairment, and explain the various ways a company may value debt securities in their balance sheets.
4. From the example in the case of Lehman Brothers, discuss how internally inconsistent valuations can affect the balance sheet of an enterprise.
5. a) How can firms value their financial assets that are not continuously quoted prices determined in deep, liquid markets under Fair Value Accounting?'
(b) Why should the analysts maintain an attitude of skepticism bordering on distrust?
Explanation / Answer
Answer(1): Traditional Approach to financial statement analysis- This approach includes "Profit & loss statement and Balance sheet". This is based on old accounting rules and format. This proforma of making financial statement is very simple and easy but not so informative, reliable and attractive. Nowadays this approach is used by small companies.
Modern Approach to financial statement analysis- This approach is new and adopted by most of the big companies in today's scenario. In this approach of financial statement analysis, these statements are prepared:
These statements represent the company's financial, profitability and liquidity position in the market. This approach is more reliable and informative. This approach is specific and uses the current rules of accounting. This approach says that read between the lines.
Ways corporations can use financial reporting as a means to enhance value:
Answer(3): Impairment- It is the reduction in the value of fixed asset. It happens when there is sudden decrease in the fair value of asset and comes below the amount that had been recorded in the balance sheet.
Example: Impairment on asset is analyzed periodically by accountant and if he finds there is impairment in the asset, he writes off the amount that is difference between fair value and book value of the asset.
Various ways a company may value debt securities in their balance sheets: Debt security represents the investment in Government, treasury and municipal bonds. When bond is purchased then the acquisition cost is shown in the asset account. If bonds are held till maturity, these are considered as long term investment, if maturity is less then bonds are considered as short term investment. Debt investment is shown under Asset column of balance sheet.
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