This week’s reading in Atrill and McLaney (2013) discusses the various benefits of ratio analysis. These benefits are all worth noting. However, it is also important to keep in mind the potential problems associated with ratio analysis, some of which are

accounting

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  • Financial statement analysis: an introduction 
  • This week’s reading in Atrill and McLaney (2013) discusses the various benefits of ratio analysis. These benefits are all worth noting. However, it is also important to keep in mind the potential problems associated with ratio analysis, some of which are as listed below: 
 Comparison with industry averages is difficult if a firm operates in many different divisions. 

 Seasonal factors can distort ratios. 

 An ‘average’ performance is not necessarily a satisfactory performance. 

 Window dressing techniques can be used to make results look better (or worse) than they actually are. 

 Different operating and accounting practices can distort comparisons. 

 Different ratio categories can provide different signals, so that it is then difficult to assess whether an organisation is doing ‘well’ or ‘badly’ overall. 

 The reliability of the underlying financial statements may be suspect and is certainly subject to uncertainty, due to the subjectivity involved in financial reporting. 

 Different valuation bases may invalidate meaningful comparisons—e.g. one firm may be using historic cost (HC), whilst a competitor has revalued its assets. 

 An inappropriate choice of benchmark might be made. 


Regulation, accounting policy choice and international accounting: an introduction 

This second part of your Key Concept Overview for Week 3 expands upon the discussion of subjectivity in accounting, which was mentioned last week. We will also explore the current regulatory framework and recent moves to harmonise accounting practices in the international arena. Lastly, we consider what impact subjectivity has on the analysis and interpretation of accounting data. 


External reports and public reporting


In preparing external reports, accountants have an obligation to ensure that they meet all of the relevant statutory, professional and listing requirements, plus that they reflect the commercial substance of the transactions that the organisation has undertaken. However, there may be a conflict between the quantity and quality of information that the shareholders (known as stockholders in the United States) of an organisation (its owners) would like to receive and that which its directors are prepared to provide.

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