Mechanisms That Discipline Financial Reporting Quality
Given the negative implications that low financial reporting quality can have, disciplinary mechanisms need to be established to promote high reporting quality. Even though several mechanisms exist, there are certain limitations to their effectiveness. Mechanisms That Discipline Financial Reporting Quality…
Financial Reporting – Presentation Choices
The presentation choices adopted by a company when preparing its financial statements can significantly influence analysts’ and other users’ opinions on these statements. These presentation choices include both GAAP and non-GAAP measures. Presentation Choices That Influence Analyst Opinions Earnings before…
Accounting Methods Used to Manage Earnings
Investors should be mindful of how the choice of accounting method can affect financial reporting. The accounting methods selected do not have to involve complex accounting standards to significantly impact the timing of revenue and the resulting financial reports. This…
Warning Signs and Methods for Detecting Manipulations
Financial manipulation leaves a trail, like tracks on sand or snow. The manipulation could be time-related or location-related. An example of time-related manipulations is expenses capitalization, which would decrease the expenses of the current period and distribute the cost over…
Evaluate Past Financial Performance
The evaluation of a company’s past financial performance can serve many purposes. Among other things, this evaluation can assist with market-based valuations, provide a basis for forward-looking analysis, and can provide information useful for evaluating the quality of a company’s…
Forecast a Company’s Future Net Income and Cash Flow
Forecasting a company’s near-term financial performance may lead to market-based valuations or relative valuations. Forecasting generally includes an analysis of the risks in the forecasts. Quantifying these risks requires an analysis of the economics of a company’s business and expense…
Credit Quality of a Potential Debt Investment
The analysis of a company’s historical and projected financial statements is an integral part of the credit evaluation process. It helps determine a company’s ability to meet its debt obligations. Several financial ratios may be computed from these financial statements….
Screening for Potential Equity Investments
Financial ratios are oftentimes used to screen potential equity investments by identifying companies that meet specific criteria. This analysis may be used in the creation of a portfolio. Alternatively, it may form part of a more thorough analysis of potential…
Adjustments to a Company’s Financial Statements to Facilitate Comparison
Analysts frequently make adjustments to a company’s reported financial statements when comparing those statements to those of another company that uses different accounting methods, estimates, or assumptions. Adjustments include those related to investments, inventory, property, plant, and equipment; goodwill; and…
Tools and Techniques Used in Financial Analysis
Financial analysis is useful in the assessment of a company’s financial performance over time and identification of the trends in that performance. It can also be used in the valuation of a company’s equity securities, assessment of its financial risk…
