Business Analysis and Valuation Using Financial Statements Ch 4.Palepu

1、copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy chapter 4: implementing accounting analysis copyright (c) 2008 thomson south-wes

2、tern, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy key concepts in chapter 4 recasting financial statements into a template that uses standard terminology makes analys

3、is more meaningful. analyzing elements of the balance sheet for possible distortions allow the analyst to better understand the economic substance of a firms transactions and financial position. copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and

4、south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy recasting financial statements balance sheets, income statements, and statements of cash flows may be recast with standardized line-item descriptions to increase their usefulness. firms

5、 can vary in the nomenclature and formats used to report financial results templates have been designed for each of the three major financial statements to standardize the format and nomenclature refer to tables 4-1, 4-2, and 4-3 in the text. copyright (c) 2008 thomson south-western, a part of the t

6、homson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy asset distortions assets are defined as resources with probable future benefits. distortions may generally arise from ambiguities about w

7、hether: the firm owns/controls the economic resource future economic benefits can be measured with reasonable certainty fair values are higher or lower than book values copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademar

8、ks used herein under license. chapter 4: implementing accounting analysis palepu & healy asset distortions: ownership / control some types of transactions make it difficult to assess the ownership of an asset. for example: aggressive revenue recognition is likely to affect related asset values manag

9、ement may differ in opinion with auditors or analysts over the valuation of assets gaap may not capture subtleties associated with ownership or control over certain assets copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trade

10、marks used herein under license. chapter 4: implementing accounting analysis palepu & healy asset distortions: economic benefits and fair values gaap requires the immediate expensing of some resource outflows that may have future economic benefits. because considerable judgment is involved in determ

11、ining whether the value of an asset is impaired, and the amount of the impairment, assets may be misstated. copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing account

12、ing analysis palepu & healy overstated assets incentives to inflate reported earnings can result in overstated assets. some of the most common forms include: delayed write-downs of current or long-term assets understatement of reserves accelerated recognition of revenues understated depreciation/amo

13、rtization of long-term assets copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy understated assets there may be incentives for ear

14、nings to be under-reported, resulting in understated assets. conservatism in gaap may also result in understated assets. copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: impleme

15、nting accounting analysis palepu & healy understated assets: the most common causes overstated write-downs of current or long-term assets overestimated reserves overstated depreciation / amortization leased assets off balance sheet discounted receivables off balance sheet key intangible assets not c

16、apitalized copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy liability distortions liabilities are economic obligations requiring

17、future outflows of resources. distortions may generally arise from ambiguities about whether: an obligation has been incurred the proper measurement of an obligation copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks

18、used herein under license. chapter 4: implementing accounting analysis palepu & healy understated liabilities understated liabilities may arise from: incentives to overstate earnings or the strength of financial position difficulties in estimating the amount of future financial commitments copyright

19、 (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy understated liabilities: likely conditions liabilities may be understated under some of t

20、he following conditions: aggressive revenue recognition off-balance-sheet loans related to receivables off-balance-sheet long-term liabilities pension and post-retirement obligation understatements copyright (c) 2008 thomson south-western, a part of the thomson corporation. thomson, the star logo, and south-western are trademarks used herein under license. chapter 4: implementing accounting analysis palepu & healy equity distortions equity is the residual claim on a firms assets held by stockholders. since assets = liabilities + equity, distortions in assets and/or liabilities lead to