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AcF308 Exam Prep Notes

This document provides guidance on preparing for an exam in financial statement analysis. It outlines key topics that may be covered, including [1] why earnings are a more useful performance measure than cash flows, [2] steps for accounting analysis, and [3] how to adjust financial statements and assess the effects of accounting choices. It also notes that [2] exam questions may contain quantitative and discussion elements and that [3] appendices may provide additional financial information related to exam questions. Students are advised to thoroughly review lecture materials, practice tutorial questions, and understand how to apply quantitative techniques.

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43 views

AcF308 Exam Prep Notes

This document provides guidance on preparing for an exam in financial statement analysis. It outlines key topics that may be covered, including [1] why earnings are a more useful performance measure than cash flows, [2] steps for accounting analysis, and [3] how to adjust financial statements and assess the effects of accounting choices. It also notes that [2] exam questions may contain quantitative and discussion elements and that [3] appendices may provide additional financial information related to exam questions. Students are advised to thoroughly review lecture materials, practice tutorial questions, and understand how to apply quantitative techniques.

Uploaded by

aryanrao098
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Ac.

F308: Financial Statement Analysis

Exam
Exam notes

• Lecture slides and tutorials show the scope of relevant material


‒ Make sure that you have covered the things mentioned in the ‘Summary and take-
aways’ slides at the end of each subject area
• Make sure that you can do the tutorial questions (quantitative and discursive elements).
Tutorial notes on the Moodle site include solution notes and, in some cases, some
additional discussion.
• See on Moodle: Exam  Examples of exam questions
• Read the relevant sections of the course text

Page 2
Exam notes (cont.)

• Note that many questions will contain a discussion element. Be prepared to discuss any
quantitative techniques that you are asked to use.
• Appendices to the examination paper may contain, in relation to questions on the examination
paper, extracts from analyst reports, extracts from financial statements or other information
• You will not be expected to be able to derive algebraically the formulae for
– Profitability decomposition (but could be expected to apply and discuss this formula)
– Abnormal Profit (Residual Income) Valuation Model (but could be expected to explain the
bases underlying its derivation, definition of abnormal profit, clean surplus relationship,
apply it and discuss the model).
Key topic areas

• Why is financial accounting useful and why earnings are a more useful performance measure
than cash flows (timing, matching problems)?
• Steps of the accounting analysis (see lecture slide 44)
• Red flags (including the relation between earnings and cash flows)
• Understanding the reasons for and implications of aggressive and conservative accounting
• Know how to adjust financial statements and provide your views on the quality of the
accounting choices (e.g., explain whether revenue recognition was aggressive; impairments;
PPE; R&D and intangibles)
– Note our general approach: come up with expectations, calculate the difference between
expected and actual numbers, show adjustments
• Assess the effect of accounting choices (e.g., capitalize or expense R&D) on ROE
Key topic areas

• Financial ratios
– ROE and ROE decomposition (traditional and advanced)
– Leverage effect
– What ratios are used in which situation (e.g., to evaluate problem with debtors, look at
receivables turnover or days’ receivable)?
• Prepare forecast of financial statements based on the list of stated assumptions
• Valuation
– Apply abnormal earnings (residual income) and abnormal NOPAT methods
– Calculate the cost of equity capital and wacc
– Clean surplus relationship (why relevant and what accounting items violate it)
• Relative performance of valuation models

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