Question 3 A financial manager within your organisation is responsible for conducting initial reviews on entities that the management has identified as potential investments or takeover targets. He was recently asked to review a set of financial statements for an organisation that operates in a service industry. He commented that he was finding it difficult to understand how the entity was generating revenue. There were significant expenses in the statement of profit or loss for wages and there was a detailed section in the management report on the investment the entity had made in staff training and development; however the entity's statement of financial position had almost no assets. The student was questioning how he could make a realistic assessment of the likely future performance of the entity. Required: a. Discuss why, despite an entity investing in staff training and development, the statement of financial position does not contain an asset relating to human resources. (10 marks) b. Discuss why a potential investor might not wish to rely solely on the financial information within the financial statements of a service-based entity in order to make investment decisions. (10 marks) c. Earnings are extremely important to a publicly traded company and the creditors and investors of that company. However, looking at earnings without regard to the quality of those earnings is hazardous to the health of creditors and investors. How might managerial incentives affect the analysis of earnings persistence? (5 marks) Total: 25 marks