Question

Question 1 Required:

a) . Discuss the objective of financial statement analysis.

b) Do you think financial reporting plays any role in the capital markets? Explain in your own words.

c) . Why do you think it is important to review the strategy of a company before and after completing a financial statement analysis? Explain.

d). The following note appears in the financial statements of a company: “The financial statements have been prepared on the historical cost basis, except for the measurement of certain financial instruments at fair value, and incorporate the principal accounting policies set out below” Please discuss in your own words your understanding of this statement in full. Provide examples to support your discussion.

e) . The following statement was made at a recent company board meeting: “We (the company) did receive a good price for our shares issued at the initial public offering (IPO). Thank heavens we, as directors, do not need to worry about the share price in the future as is the shares are traded on the secondary market.” Do you agree with this statement? Explain.

f) . Earnings per share (EPS) is the only measurement to be used in evaluating the performance of a company. Do you agree with this statement? Explain.

g). When analysing financial statements, the analyst must be aware of possible asset and liabilities distortions. List three (3) asset and two (2) liability distortions which can occur and explain each by means of an example. The example must include the effect on the financial statements of the company.

Answer 1

a) Objective of financial statement:

The objective of financial statement is to provide information about the financial position, performance and changes in financial position of an enterprises that is useful to users of financial of financial statements.The primary objective of financial reporting is to provide useful information for decision making. The importance to our economy of providing capital market participants with information was discussed previously, as were the specific cash flow information needs of investors and creditors.

b) Financial reporting role in the capital markets:

Financial reporting has been become a mandatory in the capital markets. The shareholders belives the woth of the company by reading the financial statements. Due to the worlwide changes, the role of financial reporting in capital market is constantly growing. Financial reporting analyzed through market perspective is strongly correlated with issues like: capital allocation, financial statements, international accounting standards and informational valences.