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Accounting, Finance, SPSS
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English (U.S.)
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Topic:
FINANCIAL STATEMENT ANALYSIS
Essay Instructions:
1. What are three applications of financial statement analysis? Describe three different uses.
2. ‘Some asset valuations using historical costs are highly relevant and very representationally faithful, whereas others may be representationally faithful but lack relevance. Some asset valuations based on fair values are highly relevant and very representationally faithful, whereas others may be relevant but lack representational faithfulness.’’ Explain and provide examples of each.
3, Firms value inventory under a variety of assumptions, including two common methods: last-in, first-out (LIFO) and first-in, first-out (FIFO). Ignore taxes, assume that prices increase over time, and assume that a firm’s inventory balance is stable or grows over time. Which inventory method provides a balance sheet that better reflects the underlying economics, and why? Which method provides an income statement that better reflects the underlying economics, and why?
Text: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw (2023). Financial Reporting, Financial
Statement Analysis and Valuation, 10th Ed.
Essay Sample Content Preview:
Financial Statement Analysis, and Asset and Inventory Valuations
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Financial Statement Analysis, and Asset and Inventory Valuations
Three Applications/Uses of Financial Statement Analysis
Financial statement analysis helps stakeholders comprehend firms’ financial strength and performance.
Credit Decisions
Creditors and moneylenders use financial accounts to assess corporations’ loan repayment abilities, knowing their creditworthiness. These users examine companies’ cash flows, debt levels, and liquidity ratios (Bahlous-Boldi, 2022). For instance, firms with low debt levels indicate positive signals for moneylenders.
Investment Decisions
Business evaluators and investors use financial accounts to assess corporations’ risks, growing potential, and profitability. Roszkowska (2021) posits that equity investors use crucial financial data to make investment decisions. Therefore, evaluating an establishment’s financial statement assists these users in making informed investment choices.
Performance Evaluation
Organization managers use financial account analysis to evaluate their firms’ performance. They compare goals and benchmarks against performance to get a clear picture. This information assists them in making operational changes and strategic plans. It is essential for managers to detect possible business risks and opportunities.
Asset Valuations Based on Fair Values vs Using Historical Costs
Business stakeholders should understand representationally faithful and relevance when valuing assets. Wahlen et al. (2023) state that relevant financial data influences users’ decisions, while representationally faithful information represents the users’ expectations.
Fair Values
Valuing market securities based on fair values is highly relevant and representationally faithful. The reason for being highly relevant is that they reflect present marketplace conditions. The securities’ valu...
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