ACC Week 11 Assignment

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Economics

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Feb 20, 2024

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Six-Step Process Involved in Valuation Six sequential steps make up the method for analyzing financial statements effectively for valuation and other decisions: Identify the Industry's Economic Characteristics: All operations related to the design, production, and supply of a good or service are included in the value chain analysis. The Porter Five Forces method or another methodology, such as examining economic features, is typically used in this step (Writers@Aspire, 2022). Primary, exploring the industry's economics and competitive environment is necessary. For instance, the market might be dominated by companies offering identical goods, like grocery stores, or it might only have a few rivals selling distinctive goods, like pharmaceutical firms. So, the first step of the process is crucial, which involves understanding the industry's competitive forces and creating the economic framework and context for the subsequent steps ( Wahlen et al., 2015). Identify Company's Strategy and Sustain Competitive Advantage: It is time to decide which strategies a business can employ after grasping the sector's economic characteristics. The strategy of the individual firm is examined in the context of the market's competitive dynamics. A company's business plan must be unique and successful in its sector; it should be sustainable and have competitive advantages. For example, the goods should be made to cater to niche markets, such as those for ethnic or healthy foods, or they should be marketed to a broad range of consumers, such as regular grocery shops and family-style diners. Knowing a company's strategy and the viability of its competitive edge gives the company the context required to analyze profitability and risk, evaluate accounting data, and forecast its future business operations ( Wahlen et al., 2015). 1

Assess the Quality of the Firm's Financial Statements: To accurately assess the firm's profitability and risk and to forecast its financial statements, it is vital to comprehend the caliber of the accounting information the company uses. Therefore, critical financial statements need to be reviewed. When verifying the balance sheet accounts, ensure they are assessed in the context of applicable accounting rules. For instance, companies must compile their financial accounts following U.S. GAAP or IFRS created by the International Accounting Standards Board (IASB). Also, an individual can accurately analyze the income statement after correctly examining the earnings quality as a full picture of the company's economic success (Writers@Aspire, 2022). For example, earnings that include nonrecurring gains or losses, like a write-down of goodwill, should be assessed differently from components of earnings that are subject to recurring analysis. Thus, the company's accounting and financial reporting accuracy must be evaluated ( Wahlen et al., 2015). Analyze the Current Profitability and Risk of the Firm using the Information in the Financial Statements: A company's profitability and risk can be analyzed using a set of financial ratios. For example, it can help diagnose the company's rate of return from using its assets, the rate of return for its owners of common equity, the company's expanding/contracting profit margin, the company's capital structure leverage, and many other factors. So, ratios show relationships between certain financial statement items ( Wahlen et al., 2015). Therefore, it's crucial to understand how to break down return measurements into their primary influencing components and conduct a comparative analysis of financial statement ratios. Prepare the Forecasted Financial Statements: The company projects its future financial statements using the above data. For instance, it can help forecast the company's future assets, liabilities, investments, returns on investments, cash flows, revenues, expenses, profitability, 2

risk, and other factors. The foundation for estimating future profitability and risk, which serves as a basis for financial decision-making, particularly valuation, is provided by forecasted financial statements ( Wahlen et al., 2015). This step will enable a financial strategy to be appropriately structured per the objectives and implications. Valuation of the Firm: Forecasts of upcoming earnings, cash flows, and dividends as indicators of anticipated future payoffs for the company can be inferred from projected financial statements. For example, financial experts propose buying, selling, or keeping equity securities of various companies whose market prices are too low, too high, or about right using their estimations of share value. There are numerous approaches to completing a valuation, including the dividend discount model and discounted cash flow approach ( Economics, 2016). This step is essential because many people experience legal challenges due to unclear financial accounting, such as fraudulent reporting, aggressive accounting, etc. Therefore, every businessperson must comprehend and be able to spot all forms of financial manipulation (Writers@Aspire, 2022). To conclude, this assignment goes through six interrelated steps involved in valuation. These steps offer a logical, effective progression that handles vital and challenging issues, such as evaluating and examining a corporation ( Wahlen et al., 2015). 3

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References: Economics. (2016). Six Interrelated Sequential Steps in Financial Statement Analysis. Retrieved from https://siteeconomics.blogspot.com/2016/07/six-interrelated-sequential-steps- in.html on November 18, 2022. Walker, E. (2020). 6 Steps to an Effective Financial Statement Analysis. Retrieved from https://www.complianceprime.com/blog/2020/03/13/6-steps-to-an-effective-financial- statement-analysis/ on November 16, 2022. Writers@Aspire. (2022). 6 Steps to Analyze Financial statement Effectively. Retrieved from https://aspireapp.com/blog/6-steps-to-analyze-financial-statements-effectively n November 15, 2022. Wahlen, J M & Baginski, S P & Bradshaw, M T. (2015). Financial Reporting, Financial Statement Analysis, and Valuation: A strategic perspective. (8 th ed). Cengage Learning. 4

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