ACCT13017 Questions: Week 1 Focus on Reality

Question 1

Do you think it is important to focus on a firm’s economic and business realities rather than on its financial statements? After all, is not financial statement analysis about analysing financial statements? Discuss, including your thoughts about what a firm’s financial statements may, or may not, tell us.

Question 2

When studying financial statement analysis, what risks are there in having a background in finance or accounting? Surely having a background in finance or accounting is better than having a background in, say, classical music, when studying financial statement analysis? Or is it? Discuss, particularly telling me how you think your background may be useful (or dangerous) in learning about financial statement analysis.

Question 3

What does it mean that ‘value, like beauty, is in the eye of the beholder’? What does it mean to say that our views on what adds value are personal? If everything is just subjective, or personal, how do we know what is the ‘right’ answer? How do we not get lost in a swamp of confusion? Discuss in the context of analysing financial statements.

Question 4

What are some problems or risks in using valuation models such as the DCF and economic profit frameworks? What benefits are there in using such frameworks? Do you have any concerns about learning frameworks, particularly those that, as far as you know, may or may not be used widely in practice? Discuss.

Question 5

For whom do firms seek to ‘add value’? Do you think anyone has a legitimate interest in a firm other than equity investors? Why or why not? Do you think people other than equity investors can gain useful insights from analysing a firm’s financial statements? Discuss, telling me what you really think, rather than telling me what you think I might think (which is, at best, a perilous activity in any case).

Question 6

Financial statements are hard numbers on paper. How could ‘dreaming about the future’ have anything to do with analysing a firm’s financial statements? Discuss.

Question 7

If share prices of listed companies always fully reflect all publicly available information on a firm, what point is there in doing financial statement analysis? Discuss, outlining any concerns you may have about this issue in relation to studying financial statement analysis.

Question 8

What does ‘fully reflect’ (referred to in Question 1-7 above) mean? If there is no one ‘true value’ for a firm, how can share prices ‘fully reflect’ all publicly available information? In your answer, explore the idea of share prices ‘fully reflecting’ any piece of information. What sort of assumptions underlie this concept or way of thinking? Do these assumptions seem sensible, or ‘make sense’, to you? Why or why not? Also, consider what happens to publicly available information when it is released by a firm (for example, where does it go? what do people do with it?).