Question

1.a) Explain what determines the value of a company’s stock and what determines a credit quality?

b) What is the best way to appreciate the interrelatedness of the income statement, the balance and the statement of cash flows?

2. What are some of the limitations of financial statement analysis highlighted by Enron’s success in sustaining its fraud over a long period?

b) What role did the SOX Act provision play in the HealthSouth fraud?

3. Discuss the reasoning behind Scrushy’s overstatement of the impact of changes in Medicare reimbursement?

b) What elaborate financial engineering technique was disclosed in the footnotes of Parmalat’s Brazilian unit; and how did it affect shareholder’s equity, and why is the technique an example of hedging?

Answer 1

1.a) Such a rating is used to measure the level of financial risk of the business to a lender and the probability of the business defaulting on the loan. The information used to create a rating is gathered from companies with which the business has had financial relationships, such as suppliers or other lenders.

1.b) The income statement, balance sheet and cash flow statement are all interrelated. The income statement describes how the assets and liabilities were used in the stated accounting period. The cash flow statement explains cash inflows and outflows, and it will ultimately reveal the amount of cash the company has on hand, which is also reported in the balance sheet. By themselves, each financial statement only provides a portion of the story of a company's financial condition.

2.a) a. Auditors failed to catch the errors
b. Financial Reports were unfathomable
Analysts should be weary when strong likelihood of financial manipulation.