ACCT13017 Questions: Weeks 4 – 6 Understanding the Past

Question 1

Why should we bother restating a firm’s financial statements? What benefit is there in simply re-arranging the elements of a firm’s financial statements?

Question 2

Why is clearly separating a firm’s operating and financial activities a “powerful way of viewing a firm”? What is the difference between a firm’s operating and financial activities? Why is this difference so fundamental that there is benefit in considering each quite separately?

Question 3

Why does the quote from Merton Miller (of ‘Modigliani and Miller’ fame) in this chapter that “… showing what doesn’t matter can also show, by implication, what does” actually mean to you? What benefit might there be in focusing on the enterprise of a firm, rather than on its equity? What risks or dangers might there be in this approach?

Question 4

What aspects of a firm’s financial statements drive its Return on equity (ROE)?

Question 5

Which aspects that you identified in your answer to Question 4-4 above do you think are the most important? What, in turn, drives these accounting drivers of a firm’s financial performance? When analysing a firm’s financial statements, what do you think we should focus on, and why? ‘