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1、Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Chapter 4:Implementing Accounting Analysis,Copyright(c)2008 Thomson South-Western,a part o
2、f the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Key Concepts in Chapter 4,Recasting financial statements into a template that uses standard terminology makes analysis more meaningful.An
3、alyzing elements of the balance sheet for possible distortions allow the analyst to better understand the economic substance of a firms transactions and financial position.,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks
4、 used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Recasting Financial Statements,Balance sheets,income statements,and statements of cash flows may be recast with standardized line-item descriptions to increase their usefulness.Firms can vary in the nomenclature and f
5、ormats used to report financial resultsTemplates have been designed for each of the three major financial statements to standardize the format and nomenclatureRefer to Tables 4-1,4-2,and 4-3 in the text.,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,a
6、nd South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Asset Distortions,Assets are defined as resources with probable future benefits.Distortions may generally arise from ambiguities about whether:The firm owns/controls the economic resourc
7、eFuture economic benefits can be measured with reasonable certaintyFair values are higher or lower than book values,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accoun
8、ting AnalysisPalepu&Healy,Asset Distortions:Ownership/Control,Some types of transactions make it difficult to assess the ownership of an asset.For example:Aggressive revenue recognition is likely to affect related asset valuesManagement may differ in opinion with auditors or analysts over the valuat
9、ion of assetsGAAP may not capture subtleties associated with ownership or control over certain assets,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisP
10、alepu&Healy,Asset Distortions:Economic Benefits and Fair Values,GAAP requires the immediate expensing of some resource outflows that may have future economic benefits.Because considerable judgment is involved in determining whether the value of an asset is impaired,and the amount of the impairment,a
11、ssets may be misstated.,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Overstated Assets,Incentives to inflate reported earnings can resu
12、lt in overstated assets.Some of the most common forms include:Delayed write-downs of current or long-term assetsUnderstatement of reservesAccelerated recognition of revenuesUnderstated depreciation/amortization of long-term assets,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporat
13、ion.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Understated Assets,There may be incentives for earnings to be under-reported,resulting in understated assets.Conservatism in GAAP may also result in understate
14、d assets.,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Understated Assets:The Most Common Causes,Overstated write-downs of current or l
15、ong-term assetsOverestimated reservesOverstated depreciation/amortizationLeased assets off balance sheetDiscounted receivables off balance sheetKey intangible assets not capitalized,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are t
16、rademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Liability Distortions,Liabilities are economic obligations requiring future outflows of resources.Distortions may generally arise from ambiguities about whether:An obligation has been incurredThe proper measu
17、rement of an obligation,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Understated Liabilities,Understated liabilities may arise from:Inc
18、entives to overstate earnings or the strength of financial positionDifficulties in estimating the amount of future financial commitments,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter
19、4:Implementing Accounting AnalysisPalepu&Healy,Understated Liabilities:Likely Conditions,Liabilities may be understated under some of the following conditions:Aggressive revenue recognitionOff-balance-sheet loans related to receivablesOff-balance-sheet long-term liabilitiesPension and post-retiremen
20、t obligation understatements,Copyright(c)2008 Thomson South-Western,a part of the Thomson Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Equity Distortions,Equity is the residual claim on a firms as
21、sets held by stockholders.Since Assets=Liabilities+Equity,distortions in assets and/or liabilities lead to distortions in equity.The nature of hybrid securities needs to be considered to reduce any possible bias in the financial statements.,Copyright(c)2008 Thomson South-Western,a part of the Thomso
22、n Corporation.Thomson,the Star logo,and South-Western are trademarks used herein under license.,Chapter 4:Implementing Accounting AnalysisPalepu&Healy,Concluding Comments,Recasting financial statements is an important step to facilitate comparability among financial statements analyzed.Analysts should focus on evaluating and adjusting accounting measures that describe the firms key strategic value drivers.It is important to keep in mind that many accounting adjustments will be estimates.,
