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Lecture 3: Accounting analysis (1) - Coggle Diagram
Lecture 3: Accounting analysis (1)
Accounting analysis overview
important
precondition
for financial analysis
The Briloff effect
reviewed financials and criticized accounting policies
market reaction during day 0 is
-8.11%
average cumulative abnormal returns a month after are
-12.94%
prospect theory: significant
negative effects
on share price and manager reputation if
expectations not meet
Typical accruals
Receivables/ Payables, inventories
Prepayment/ Unearned revenue
Depreciation and Amortization
Provisions and write- offs
Prelude to an accounting quality analysis
Understand the accounting policies
Understand the
business areas
where accounting quality is most doubtful
Understand the business
Understand
situations
in which management are particularly tempted to "manage earnings"
Accounting areas where
manipulation
is more likely
Computer software
Marketability of products
: quality of capitalized R&D
Computer hardware
Technological change
: quality of receivables and inventory
Banking
Credit losses
: quality of loan loss provisions
Retailing
Credit losses
: quality of net account receivables
Inventory obsolescence
: quality of carrying values of inventory
Rebate programs
: quantity of sales and estimated liabilities
Telecommunications
Technological change
: quality of depreciation allowances
Automobiles
Overcapacity
: quality of depreciation allowances
Manufacturing
Warranties
: quality of warranty liabilities
Product liability
: quality of estimated liabilities
Drugs
R&D
: quality of R&D expenditures
Product liability
: quality of estimated liabilities
Process of accounting analysis
Evaluating Earnings Quality
Evaluate accounting/ reporting
strategy
Evaluate the
quality of disclosures
Assess accounting
flexibility
Identify and assess
potential red flags
Identify and access key
accounting policies
Adjusting Financial Statements
Undo accounting
distortions