ACX3150 TUTE 5 – ACCOUNTING ANALYSIS

Chapter 3: Q2,4,7

Q2)

Fred argues: ‘The standards that I like most are the ones that eliminate all management discretion in reporting – that way I get
uniform numbers across all companies and don’t have to worry about doing accounting analysis.’ Do you agree? Why or why
not?

Disagree –

If you use the same standards, you’re assuming that standards are one size fit all – not a true representation of the firm’s
business performance.

Managers have special knowledge about how the company is performing – so better to have them do the reporting as they
could provide more accurate information about the underlying economic reality of the business.

Giving managers some leeway to report numbers based on their own discretion is important and beneficial due to their special
knowledge about the company. But if you give them too much discretion, they can report numbers to suit themselves. But
unlike what Fred argues, if you don’t give them any discretion at all, they’ll be forced by the standards to report numbers that
aren’t reflective of the underlying reality either.

Q4)

Cash ratio – provides info about liquidity – with a higher ratio, company is more liquid.

Q7)

Management change = bad news

Might be changing policy on depreciation –

CASE STUDY

Analyse each segment of the business – look at each success factor to identify red flags

3) NPAT and Operating CF aren’t following the same trend/align with each other – so need to investigate for any manipulation

4) Usually NPAT should be less than operating CF because expenses like COGS and depreciation will reduce the NPAT.

For assignment:

Go on data premium analysis database