Relevant Adjustments for Improving Quality and Comparability with Similar Companies
Off-Balance-Sheet Financing Off-balance-sheet financing is an accounting practice where companies exclude liabilities on their balance sheet and the associated interest expense on the P&L. Operating lease is a typical example of off-balance-sheet financing. It is an expense that is kept…
Financial Reporting Choices and Bias that Affect the Quality and Comparability of a Company’s Financial Statements
Assume that our purpose for analysis is to identify and evaluate the drivers of financial success for ABC Ltd., a publicly held company in India, which is a leading car manufacturer. Further, we want to identify and understand the risks…
Cyber Risk and the U.S. Financial System: A Pre-Moterm Analysis
After completing this reading, you should be able to: Explain the direct costs of and the spillovers caused by a cyber-attack. Explain how cyber shocks can get amplified through financial networks. Discuss the policy responses that can be implemented against…
Replacing LIBOR
After completing this reading, you should be able to: Explain the key issues that could cause systemic disruption when LIBOR ends. Explain the current state of the transition and the challenges that lie ahead. Describe the government institutions’ role in…
Use of a Framework to Analyze a Firm’s Financial Statements
Financial analysis is crucial as it aids investors and other financial decision-makers to work out effective economic decisions. This ensures that the possibility of a successful outcome is on the decision maker’s side. A basic framework to aid in financial…
Evaluation of Earnings Quality
We analyze companies’ earnings to understand the earnings quality, i.e., the persistence and sustainability of earnings. Many accounting policies demand estimations and rely on subjective decisions. Some managers take advantage of this and indulge in creative accounting to report misleading…
Sources of Information about Risk
Examining financial, operating, and other risks is an essential part of an analyst’s job. Here, we discuss sources of information about risk. Financial Statements A company’s financial statements provide useful indicators of financial, operating, or other risks. For example, leverage…
Evaluation of the Balance Sheet Quality of a Company
Recall from the previous section that high financial reporting quality of the balance sheet is stipulated by completeness, unbiased measurement, and clear presentation. The existence of off-balance-sheet liabilities (obligations) such as debts compromises the completeness of a balance sheet. Also,…
Indicators of Balance Sheet Quality
Completeness, unbiased measurement, and clear presentation indicate high financial reporting quality of the balance sheet. Moreover, a strong balance sheet has an optimal leverage amount, adequate liquidity, and economically successful asset allocation. Balance sheet strength is assessed using ratio analysis….
Evaluating the Cash Flow Quality of a Company
The cash flow statement is used to identify areas of possible earnings manipulation since OCF is viewed as less subject to manipulation relative to earnings. An analyst should check for any unusual items or items that have not been present…
