Tekst Overview of accounting analyses

13 important questions on Tekst Overview of accounting analyses

Expensing the cost of intangibles has two implications for analysts, which are they?

  1. Omission of intangible assets from the balance sheet inflates measured rates of return on capital (return on assets or return on equity).
  2. It makes it more difficult for the analyst to assess whether the firm's business model works. 

What are the warning signs of inadequate allowances?

Growing days receivable, business downturns for a firm's major clients, and growing loan delinquencies (betalings achterstanden).

What are receivables that are discounted with a financial institution?

They are considered sold if the seller cedes (afstaan) control over the receivables to the financier. Control is surrendered if the receivables are beyond the reach of the seller's creditors should the seller file for bankruptcy, if the financier has the right to pledge or sell its interest in the receivables, and if the seller has no legal right or commitment to repurchase the receivables. The seller can then record the discount transaction as an asset sale.
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With discount receivables is their any risk for the seller?

Financial institutions that discount receivables often have recourse (terughalen, beroep) against the seller, requiring the seller to continue to estimate bad debt losses and record recourse liability (aansprakelijkheid) for the amount of losses that it guarantees. 

How should liabilities be assessed?

Analysis of liabilities is usually with an eye to assessing whether the firm's financial commitments and risks are understated and/or its earnings overstated.

When are liabilities likely to be understated?

Liabilities are likely to be understated when the firm has key commitments that are difficult to value and therefore not considered liabilities for financial reporting purposes. 

The most common forms of liability understatement arise when the following conditions exist:

  • unearned revenues are understated through aggressive revenue recognition
  • provisions are understated
  • loans from discounted receivables are off-balance sheet
  • non-current liabilities for leases are off-balance sheet
  • post-employment obligations, such as pension obligations, are not fully recorded

Explain unearned revenues understated.

If cash has already been received but the product or service has yet to be provided, a liability (unearned or deferred revenues) is created. Firms that recognise revenues prematurely, after the receipt of cash but prior to fulfilling their product or service commitments to customers, understate deferred revenue liabilities and overstate earnings. Firms that bundle service contracts with the sale of a product are particularly prone to deferred revenue liability understatement since separating the price of the product from price of the service is subjective. 

What is a provision?

Obligations that are likely to result in a future outflow of cash or other resources but for which the exact amount is hard to establish. 

Name two contingent claims.

1. employee stock options
2. conversion options on convertible debentures (obligaties)

What is a stock option?

A stock option gives the holder the right to purchase a certain number of shares at a predetermined price, called the exercise or strike price, for a specified period of time, termed the exercise period. 

What do proponents (voorstanders) of options argue?

They argue that they provide managers with incentives to maximise shareholder value and make it easier to attract talented managers. 

What are convertible debentures?

They contain a stock option component. Holders of these debentures (obligaties) have the right to purchase a certain number of shares in exchange for their fixed claim. 

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