Financial statement analysis is a process conducted by internal and external partiesto gain a better understanding of how a company is performing. For internal users,financial performance is examined to determine their respective companies' well-being and standing. For external users, financial performance is analysed todetermine potential investment opportunities and to determine if a company is worththeir while. Despite financial statement analysis being widely used, it does not fail todeal with limitations. Hence, in your own words and understanding, and relevantexamples, discuss THREE (3) limitations of using financial statement analysis inevaluating a company's financial performance.(15 Marks)

The financial statement analysis is the analysis of statements of company in order to find out the…

Answered: statement analysis is a process…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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3. STATEMENT 1: The objective of the financial statement analysis is to provide financial information about the financial position, performance, and changes in financial position of the entity that is useful to wide range of users. STATEMENT 2: Information from the financial statement analysis can be use in assessing and evaluating the firm's past performance, present condition. STATEMENT 3: Financial Statement analysis is a broader evaluating activity of an enterprise that focuses on the internal and external factors a. All statements are True b. Statements 1 and 2 are True c. Statements 2 and 3 are True d. Statements 1 and 3 are True
How can the enhancing characteristic understandability be improved in high-quality accounting information? Do not simply repeat what it is, provide suggestions as to how a particular part of the enhancing characteristic could be improved. Please provide different answers and explanations than copy and pasting: “Information that is understandable to the average user of financial statements is highly desirable.”
Evaluate the following statements from an ethical perspective:“Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.”“Earnings are potentially managed, because financial accounting standards still provide alternative methods.”
The fundamental qualitative characteristics that financial information must possess to be useful to the primary users of general purpose financial reports—identified in the Conceptual Framework are ‘relevance’ and ‘faithful representation’. Required: a) Provide one example where information is relevant but not faithfully represented. (explain) b) Provide one example where information is not relevant but is faithfully represented. (explain) c) Provide one example where information is relevant and faithfully represented. (breifly explain)
Qualitative characteristics make accounting information useful for decision-making purposes. Identify the qualitative characteristic that is being adopted or not adopted for each of the following situations. You may copy and paste from this list: comparability predictive value consistency relevance confirmatory value timeliness faithful representation understandability materiality verifiability The quality of Walmart’s financial information helps its users to correct their prior expectations on share prices. Answer Walmart is the only company in its industry to depreciate its plant assets on a straight-line basis. Answer Walmart switches from first-in first-out (FIFO) to average-cost (AVCO) and then back to FIFO over a 2-year period. Answer Walmart does not issue its first-quarter report until…
Which of the following is not considered as external users of general purpose financial statements a. Government b. Lenders C. Rank and file employees of the company d. Investors This fundamental characteristic requires a piece of information to be complete, neutral, and free from material error a. Faithful representation b. Relevance c. Verifiability d. Comparability Which of the following is not an enhancing characteristic a. Verifiability b. Comparability c. Understandability d. Relevance
Accounting information provides useful information about business transactions and events. Those whoprovide and use financial reports must often select and evaluate accounting alternatives. The Conceptual Framework examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information.For each of the following pairs of information characteristics, provide a hypothetical situation in which inwhich one of the characteristics may be sacrificed in return for a gain in the other. Explain the situationand criterion should be used to evaluate trade-offs between information characteristics? give your opinionsthati) Relevance and faithful representation.ii) Comparability and consistency.iii) Relevance and consistency.iv) Relevance and understandability.
What are the qualitative characteristics of financial statements according to the Framework? Qualitative characteristics are broad classes of financial effects of transactions and other events Qualitative characteristics are the attributes that make the information provided in financial statements useful to others. Qualitative characteristics measure the extent to which an entity has complied with all relevant Standards and Interpretations. Qualitative characteristics are non-quantitative aspects of an entity’s position and performance and changes in financial position
Financial statements should be based on accounting principles alone and not serve the interests of any particular user group. Which characteristic of a good financial statement does this refer to? A. Reliability B. Relevant C. Comparable D. Neutral
Financial reporting: Multiple Choice O is designed primarily to meet the needs of banks, taxing authorities, and other Governmental regulatory bodies such as the SEC. O is future oriented in nature, with detailed disclosures about a company's operating plans to allow investors to make accurate earnings projections. is designed primarily for internal planning, control, and decision-making purposes. includes detailed notes and other disclosures about a company's past performance.
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6 Explain why financial statement information has characteristics of a public good. Include a definition of a public goods in your answer. What does this imply about using the extent of security market reaction to accounting information to guide accountants?

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