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financial statement analysis
Financial Statement Analysis 10th International Edition John Wild - Solutions
2–56A. What does the opinion section of the auditor’s report usually cover?
2–55A. What are auditing procedures? What are some basic objectives of a financial statement audit?
2–54A. What are generally accepted auditing standards?
2–53. Would you be willing to pay more or less for a stock, on average, when the accounting information provided to you about the firm is unaudited? Explain.
2–52. Explain how accounting concepts and standards, and the financial statements based on them, are subject to the pervasive influence of individual judgments and incentives.
2–51. Describe the role that accrual accounting information and cash flow information play in your own models of company valuation.
2–50. Explain what is meant by the term earnings management and what incentives managers have to engage in earnings management.
2–49. What are popular earnings management strategies? Explain.
2–48. Why do managers sometimes manage earnings?
2–47. What gives rise to accounting distortions? Explain.
2–46. What is the process to carry out an accounting analysis?
2–45. What is accounting analysis? Explain.
2–44. Explain how estimates and judgments of financial statement preparers can create differences between financial statement information and economic reality.
2–43. What are the major issues that an analyst needs to consider when analyzing financial statements prepared under the fair value accounting model?
2–42. In your opinion does historical cost or fair value model generate more (a) relevant and (b) reliable accounting information? Argue your case.
2–41. Discuss the advantages and disadvantages of fair value accounting.
2–40. Describe the three basic valuation approaches for estimating fair values. Relate the valuation approaches to hierarchy of inputs.
2–39. Which types of assets/liabilities lend themselves more easily to fair value measurements: financial or operating? Explain with reference to the hierarchy of inputs.
2–38. Explain the hierarchy of inputs used in determining fair values. The use of which level of input lowers the reliability of fair value estimates?
2–37. Fair values are market-based measurements not entity-specific measurements. Explain with an example.
2–36. Provide a formal definition for fair value. What are the key elements of this definition?
2–35. Describe what income purports to represent under the historical cost and the fair value accounting models. How is income determined under either model?
2–34. What are the key differences between the historical cost and the fair value models of accounting?
2–33. Explain how accounting principles can, in certain cases, create differences between financial statement information and economic reality.
2–32. What adjustments would you make to net income to determine economic income?
2–31. Determining core income is an important first step to estimating permanent income. Explain. What adjustments to net income should be made for estimating core income?
2–30. Define and cite an example of a value irrelevant component of income.
2–29. Distinguish between the permanent and transitory components of income. Cite an example of each, and discuss how each component affects analysis.
2–28. Accounting income has elements of both permanent income and economic income. Explain this statement.
2–27. Explain how accountants measure income.
2–26. Economic income measures change in value while permanent income is proportional to value itself.Explain this statement.
2–25. What are the two basic economic concepts of income? What implications do they have for analysis?
2–24. Define income. Distinguish income from cash flow.
2–23. Accrual accounting information, cash flow information, and analysts’ forecasts are information for investors. Compare and contrast each of these sources in terms of relevance and reliability.
2–22. Accrual accounting information is conceptually more relevant than cash flows. Describe empirical findings that support this superiority of accrual accounting.
2–21. What factors give rise to the superiority of accrual accounting over cash accounting? Explain.
2–20. Explain why cash flow measures of performance are less useful than accrual-based measures.
2–19. Distinguish between short-term and long-term accruals.
2–18. Explain when costs should be recognized as expenses.
2–17. Describe the criteria necessary for a business to record revenue.
2–16. It is difficult to measure the business performance of a company in the short run using only cash flow measures because of timing and matching problems. Describe each of these problems and cite at least one example for each.
2–15. Describe at least four major limitations of financial statement information.
2–14. Describe empirical evidence showing that financial accounting information is relevant for decision making.
2–13. What are the two types of conservatism? Which type of conservatism is more useful for analysis?
2–12. What is conservatism? What are its advantages?
2–11. Explain historical cost and fair value models of accounting. What explains the move toward fair value accounting?
2–10. Describe tasks that financial intermediaries perform on behalf of financial statement users.
2–9. Describe alternative information sources beyond statutory financial reports that are available to investors and creditors.
2–8. Describe forces that serve to limit the ability of management to manage financial statements.
2–7. Describe factors that bring about managerial discretion for preparing financial statements.
2–6. Who has the main responsibility for ensuring fair and accurate financial reporting by a company?
2–5. Explain how accounting standards are established.
2–4. What constitutes contemporary GAAP?
2–3. Describe the content and purpose of at least four financial reports that must be filed with the SEC.
2–2. Why are earnings announcements made in advance of the release of financial statements? What information do they contain and how are they different from financial statements?
2–1. Describe the U.S. financial reporting environment including the following:a. Forces that impact the content of statutory financial reportsb. Rule-making bodies and regulatory agencies that formulate GAAP used in financial reportsc. Users of financial information and what alternative sources
1–33. Discuss implications of the efficient market hypothesis (EMH) for financial statement analysis.
1–32. Explain how the efficient market hypothesis (EMH) depicts the reaction of market prices to financial and other data.
1–31. Identify and describe a technique to compute equity value only using accounting variables.
1–30. What is amiss with the claim: The value of a stock is the discounted value of expected future cash flows?
1–29. Explain the claim: While we theoretically use the effective interest rate to compute a bond’s present value, in practice it is the other way around.
1–28. What is meant by “time value of money”? Explain the role of this concept in valuation.
1–27. Identify four specialized financial analysis tools.
1–26. Ratio analysis is an important tool in financial analysis. Identify at least four ratios using:a. Balance sheet data exclusively.b. Income statement data exclusively.c. Both balance sheet and income statement data.
1–25. Identify and describe limitations of ratio analysis.
1–24. What is a necessary condition for usefulness of a ratio of financial numbers? Explain.
1–23. Common-size analysis is an important tool in financial analysis.a. Describe a common-size financial statement. Explain how one is prepared.b. Explain what a common-size financial statement report communicates about a company.
1–22. Explain what useful information is derived from index-number trend analysis.
1–21. Describe criteria in selecting a base year for index-number trend analysis.
1–20. Identify conditions that prevent computation of a valid percent change. Provide an example.
1–19. Compare the “absolute amount of change” with the percent change as an indicator of change. Which is better for analysis?
1–18. Is past trend a good predictor of future trend? Justify your response.
1–17. Comparative analysis is an important tool in financial analysis.a. Explain the usefulness of comparative financial statement analysis.b. Describe how financial statement comparisons are effectively made.c. Discuss the necessary precautions an analyst should take in performing comparative
1–16. Identify and describe at least four categories of financial analysis tools.
1–15. Identify and discuss at least two areas of financial analysis.
1–14. Identify at least seven additional sources of financial reporting information (beyond financial statements)that are useful for analysis.
1–13. Explain why financial statements are important to the decision-making process in financial analysis. Also, identify and discuss some of their limitations for analysis purposes.
1–12. Identify and discuss the four primary financial statements of a business.
1–11. Explain how financial statements reflect the business activities of a company.
1–10. Identify and discuss the four major activities of a business enterprise.
1–9. Identify at least five different internal and external users of financial statements.
1–8. Describe financial statement analysis and identify its objectives.
1–7. Describe the importance of accounting analysis for financial analysis.
1–6. What are the various component processes in business analysis? Explain with reference to equity analysis.
1–5. What is fundamental analysis? What is its main objective?
1–4. What are the main differences between credit analysis and equity analysis? How do these impact the financial statement information that is important for each type of analysis?
1–3. Describe the different types of business analysis. Identify the category of users of financial statements that applies to each different type of business analysis.
1–2. Explain the claim: Financial statement analysis is an integral part of business analysis.
1–1. Describe business analysis and identify its objectives.
1. Analyze and measure earnings quality and its determinants(Appendix 2B).
1. Explain the relevance of auditing and the audit report (opinion)for financial statement analysis (Appendix 2A).
1. Describe the need for and techniques of accounting analysis.
1. Explain fair value accounting and its differences from the historical cost model; identify the merits and demerits of fair value accounting and its implications for analysis.
1. Understand economic concepts of income, and distinguish it from cash flows and reported income; learn to make adjustments to reported income to meet analysis objectives.
1. Explain the importance of accrual accounting and its strengths and limitations.
1. Describe the relevance of accounting information to business analysis and valuation, and identify its limitations.
1. Describe the objectives of financial accounting; identify qualities of accounting information and principles and conventions that determine accounting rules.
1. Identify what constitutes generally accepted accounting principles (GAAP).
1. Explain the financial reporting and analysis environment.
1. Explain the purpose of financial statement analysis in an efficient market.
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