Question

(a). distinguish between equity analysis and credit analysis

b). discuss the importance of conceptual framework in financial analysis and the qualitative characteristics of financial statements information as described under the conceptual framework.

c). discuss the forces that push managers to manipulate earnings results?

d). discuss the two major analysis questions when analysing receivables

e). what qestion are important to a financial analyst when reviewing the statement of cashflows ?

f). elaborate the usefulness of the dupont model in financial analysis.

Answer 1

B) The importance of conceptual framework in financial is significant, it provides a framework which creates a set of standard to be followed in general. The benefit of creating a standard is it helps to compare whether others are meeting that level or standard or exceeding that. Analysing things become slightly easier when you have a benchmark standard. It also ensures that the standard are Internally consistent. The financial statements are relevant only when they can be relied upon for decision making, no matter how beautifully accounting statement has been presented, if their realiability is questionable, the data is worthless. The financial statement has to be reliable,disclosure of material information and faithfully represented.

C) There are many reasons which push managers to manipulate the earnings results:

• Sometimes manger's bonuses are attached to the earnings level. Like in some companies for CEOs to receive their bonus they have to achieve the target return on equity.
• Mangers are also concernd about their reputation because if they have initiated a project and the return on the project is not good, it will look bad on them and it might affect their career growth.
• Managers are also concerned about the effect on earning result on the share price, market reacts very quickly to these type of announcement. If the earnings of the year or quarter are not good enough, then share price might fall drastically.

D) The two major analysis question is when analysing receivables are:

• Receivables turnover ratio : Receivables turnover ratio is an activity ratio which measures how effectively the company is managing its credit and recovring debt. A high turnover ratio implies that company is recovering its receivables very quickly but too much high can also shows that it is missing on sales by not providing sufficient credit.
• Bad debts: Some part of credit sales always result in bad debt. This number differs from Industry to Industry. Lower the bad debts the better it is. If the bad debt as percentage of total receivables is less than 1 %, it is said to be a good situation for the company.