Chapter 1 – A Framework for Business Analysis and Valuation Using Financial Statements
Quiz
Lemons problems arise in capital markets when
Managers are better informed about the value of their business ideas than investors
Managers have an incentive to understate the value of their business ideas
Managers and investors have conflicting interests
A, B, and C
A and C
Consider the following statement: “In countries with a model of strong legal protection of investors’ rights, information intermediaries play a bigger role in preventing lemons problems than in countries with a model of weak legal protection of investors’ rights.” This statement is
True
False
Mandatory publication of audited financial statements is an imperfect solution to incentive and information problems between managers and investors because
Accounting profits are typically less informative about firms’ economic performance than cash flows
The accounting standards governing the preparation of such financial statements are typically too loosely defined
Managers unintendedly as well as strategically introduce noise into reported accounting performance through their accounting decisions
None of the above
Consider the following statement: “The extent to which financial statements accurately reflect the consequences of managers’ operating, investment and financing decisions is a function of characteristics of the accounting environment and managers’ accounting strategy.” This statement is
True
False
Consider the following statement: “Accounting conventions and regulations that leave management no accounting discretion lead to more useful financial statements than accounting conventions and regulations that do grant accounting discretion.” This statement is
True
False
Consider the following statement: “Financial reports of publicly listed firms are prepared using accrual accounting rather than cash accounting.” This statement is
True
False
Consider the following statement: “The outcomes of business strategy analysis affect the financial and prospective analyses but have no relevance for the accounting analysis.” This statement is
True
False
Which of the following statements is correct?
The accounting analysis follows the financial analysis
The prospective analysis precedes the strategy analysis
The prospective analysis follows the financial analysis
The financial analysis precedes the strategy analysis
The outcomes of the strategy analysis affect the accounting analysis because
The strategy analysis also includes an analysis of the firm’s accounting strategy
Firms with poor strategies are more likely to have low-quality financial statements than firms with successful strategies
A firm’s industry and competitive strategy affect which accounting choices are appropriate.
None of the above.
Two reasons for why financial statements tend to be less useful in the analysis of privately held businesses than in the analysis of publicly held businesses (within the EU) is that
(i) Private firm’s financial statements are strongly influenced by tax rules and (ii) managers of private firms have less incentive to prepare informative financial statements than managers of public firms.
Private firm’s financial statements (i) do not comply with tax rules and (ii) are not publicly available.
Private firm’s (i) financial reporting is unregulated and (ii) financial statements are not publicly available.