Judith, an accounting major, states, "Strategy analysis seems to be an unnecessary detour in doing financial statement analysis. Why can't we just get straight to the accounting issues?" Explain to Judith why she might be wrong
Strategy analysis enables the analyst to understand the underlying economics of the firm and the industry in which the firm competes. There are a number of benefits to developing this knowledge before performing any financial statement analysis.
1 . Strategy understanding provides a context for evaluating a firm's choice of accounting policies and hence the information reflected in its financial statements. For example, accounting policies (such as revenue recognition and cost capitalization) can differ across firms either because of differences in business economics or because of differences in management's financial reporting incentives. Only by understanding differences in firms' business strategies is it possible to assess how much to rely on a firm's accounting information.
2 . Strategy analysis highlights the firm's profit drivers and major areas of risk. An analyst can then use this information to evaluate current firm performance and to assess the firm's likelihood of maintaining or changing this performance based on its business strategy.
3 . Strategy analysis also makes it possible to understand a firm's financial policies and whether they make sense. As discussed later in the book, the firm's business economics is an important driver of its capital structure and dividend policy decisions.
In summary, understanding a firm's business, the factors that are critical to the success of that business, and its key risks is critical to effective financial statement analysis.
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The distinction between recognition and realization is essential to accrual accounting, hence the importance accorded to recognition criteria. Firms recognize items that qualify for inclusion in the financial statements when they enter the financial statements. In the case of value decreases, the firm
a. recognizes the decreases as impairment expenses when it realizes the collection of the reduced cash flows. b. recognizes the decreases as cost of goods sold when the decreases occur before it realizes the collection of the reduced cash flows. c. recognizes the decreases as impairment expenses when the decreases occur before it realizes the collection of the reduced cash flows. d. recognizes the decreases as cost of goods sold when it realizes the collection of the reduced cash flows. e. None of these answer choices is correct.
On March 1, 2016, Nortons, Inc. paid $60,000 as office rent covering the three-month period ending May 31, 2016. Journalize the entry on March 1 by using the alternative treatment of deferred expenses
What will be an ideal response
Risk analysis may be introduced by
A. estimating an investment's beta. B. using the firm's cost of capital. C. reducing an investment's expected life. D. using accelerated depreciation.
Charlotte is an avid Cosmopolitan reader. In fact, she has a subscription. She also wants her best friend, Unica, to read Cosmopolitan every month so they can compare notes, but Unica doesn't want to pay for a subscription, so Charlotte passes on her copy. Unica is a member of the magazine's
A. derived readership. B. pass-along readership. C. subsidiary target audience. D. primary circulation. E. secondary target audience.