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SolutionQuestionnaireUNIT 1 - 2020

1. The document discusses key concepts related to business analysis and valuation using financial statements. It covers topics like the purpose of financial reporting, accounting standards, noise in financial statements, and managers' discretion. 2. Managers have some ability to use accounting choices and estimates to introduce noise or distort a company's true performance in its financial statements. The three main sources of noise are accounting conventions, estimation errors, and intentional distortions. 3. Financial statement regulation and enforcement vary across countries and legal regimes. Stricter legal liability tends to result in higher quality financial reporting from managers. Harmonization of international accounting standards has increased over time.

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103 views3 pages

SolutionQuestionnaireUNIT 1 - 2020

1. The document discusses key concepts related to business analysis and valuation using financial statements. It covers topics like the purpose of financial reporting, accounting standards, noise in financial statements, and managers' discretion. 2. Managers have some ability to use accounting choices and estimates to introduce noise or distort a company's true performance in its financial statements. The three main sources of noise are accounting conventions, estimation errors, and intentional distortions. 3. Financial statement regulation and enforcement vary across countries and legal regimes. Stricter legal liability tends to result in higher quality financial reporting from managers. Harmonization of international accounting standards has increased over time.

Uploaded by

Li
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 1 – A Framework for Business Analysis and Valuation Using Financial Statements

1. It is socially important to achieve an effective allocation of resources? What is it necessary for that?
Was Enron’s capital a bad allocation? YES/INTERMEDIARIES/YES AWFULLY BAD

2. Comment on the following statement: “In countries with a model of strong legal protection of
investors’ rights, information intermediaries play a bigger role in preventing lemons problems than in
countries with a model of weak legal protection of investors’ rights.” TRUE

3. What is the purpose of the financial reporting process? Is it enough with good accounting standards
for it to be successful? SEE SLIDES 7-8/NO, YOU ALSO NEED ENFORCEMENT MECHANISMS: AUDITING,
LEGAL LIABILITY AND PUBLIC ENFORCEMENT.

4. Mandatory publication of audited financial statements is an imperfect solution to incentive and


information problems between managers and investors because:
a) Accounting profits are typically less informative about firms’ economic performance than cash flows
b) The accounting standards governing the preparation of such financial statements are typically too
loosely defined
c) Managers unintentionally as well as strategically introduce noise into reported accounting
performance through their accounting decisions
d) None of the above

5. What does it mean that financial statements contain “noise”? Is it convenient to remove it? Does
noise include only managers’ ability to distort? That the statements do not reflect the true and fair
view of the company/YES/No, there are 3 sources of noise (see Slide 38)

6. Which of the following items is not a required component of European public firms’ financial
statements?
a) A statement of changes in equity
b) An income statement
c) A cash flow statement (or statement of cash flows)
d) A balance sheet (or statement of financial position)
e) All of the above items are required components

7. Comment on the following statement: “The extent to which financial statements accurately reflect
the consequences of managers’ business activities (operating, investment and financing transactions)
is a function of characteristics of the accounting environment and managers’ accounting strategy.”
TRUE

8. Follow the example in the appendix to this questionnaire and discuss which transactions allow room
for managers’ discretion. Mainly: warranties/allowance for doubtful accounts/Depreciation

9. Comment on the following statement: “Accounting conventions and regulations that leave
management no accounting discretion lead to more useful financial statements than accounting
conventions and regulations that do grant accounting discretion.” FALSE (not necessarily)

10. Which of the following statements is true?


a) Managerial legal liability regimes are equally strict across the member states of the European Union.
b) Under a strict legal liability regime, managers tend to provide more high-quality financial reports.
c) Managerial legal liability regimes are less strict in Germany and the UK than in the US.
d) The terms legal liability and public enforcement are synonyms.

11. What were the features of the accounting standardization process 20 years ago? Has something
remarkable happened in the most recent years? Homogenization of accounting standards all over the
world. Increasing influence of the IASB model all over the world, except for US.

12. As regards the accounting standards’ setting process…


a) IASB and FASB are the two main accounting standard setting bodies in the world.
b) IFRS are issued by the FASB.
c) US GAAP are issued by the ICAC.
d) Local Spanish accounting standards are issued by the IASB.

13. What is the current situation of the accounting standardization process in the European Union? And in
Spain? Since 2005 IFRS compulsory in all member states for consolidated accounts of groups trading
in a stock market/As in many EU member States, dual model: IFRS and local standard co-exist. IFRS for
consolidated accounting of groups trading and local standards for the rest of annual accounts.

14. The Conceptual Framework…


a) …includes the objective and main premises that hold with the financial reporting process.
b) …is a necessary step subsequent to the issuance of accounting standards.
c) …is the same all over the world.
d) All of the above are correct.

15. Comment on the following statement: “Financial reports of publicly listed firms are prepared using
accrual accounting rather than cash accounting.” TRUE, but in Europe also those of privately-held
firms

16. Which of the following statements is correct?


a) Revenues cannot be recognized before cash is collected.
b) Expenses cannot be recognized before the cash outflow has occurred.
c) Revenues cannot be recognized if cash collection is uncertain.
d) Expenses will always be recognized before or when the cash outflow occurs.
e) None of the above.

17. Comment on the following statement: “An economic resource whose future benefits cannot be
measured with a reasonable degree of certainty is not considered to be an asset for accounting
purposes.” TRUE

18. The International Accounting Standards Board’s (IASB’s) Conceptual Framework includes all of the
following except:
a) Objective of the financial reporting process.
b) Quantitative characteristics of accounting information.
c) Definitions of the main elements contained in the financial statements.
d) Assumptions, principles and constraints.

19. Comment on the following statement: “The outcomes of the strategy analysis affect the accounting
analysis because a firm’s industry and competitive strategy affect which accounting choices are
appropriate.” TRUE

20. Which of the following statements is correct?


a) The accounting analysis follows the financial analysis
b) The prospective analysis precedes the strategy analysis
c) The prospective analysis follows the financial analysis
d) The financial analysis precedes the strategy analysis

Appendix
The Balance Sheet for Nortrem Co. as of Dec.31, 2014 is the following ($):

Assets Equity + Liabilities


Inventory 40 Share capital 50
Cash 10

The following transactions occurred during 2015


Sold all inventory on credit for $100.
Rent for the warehouse amounted $15 that was left unpaid.
Estimated warranties related with the above sales amount to $2.
Eight percent of ending receivables are expected to be uncollectible.
A computer is purchased on July 2015 for $20 to be paid in 2016.

- Classify the above transactions as operating, investing or financing activities.


-Prepare the 3 main financial statements: Balance Sheet (Dec. 31, 2015), Income Statement (year 2015) and Cash
Flow Statement (year 2015).

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