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Study Unit 3

Study Unit 3. Profitability Analysis & Analytical Issues 2/2 part. Introduction. Previous parts covered: Ethics and Ratios Review LOS page 91/92 as an intro How Profitability Analysis and Analytical Issues are inter-related?  restatement / adjustment

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Study Unit 3

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  1. Study Unit 3 Profitability Analysis & Analytical Issues 2/2 part

  2. Introduction Previous parts covered: Ethics and Ratios Review LOS page 91/92 as an intro How Profitability Analysis and Analytical Issues are inter-related?  restatement / adjustment Limitations of ratios = comparability issues Are the financials always a good base? What about items/risks off the books?

  3. 3.6 Factors affecting reported profitability • Income • How are we recognizing revenue and expenses? • What are the Accounting policies/rules in place? • Revenues • Sources of revenues? Quality of Revenues?  Returns • A/R and Inventories • Relationship A/R and Revenues (collectability, Cash Flows) • Revenues and Inventory (WIP, MOH, DL, Destruction…) • COGS • Gross Margin distortion = Price increase? COGS? G2N? • Expenses • Variables, Marketing, Operations, Commercial, Fixed… G&A

  4. 3.7 Effects of Foreign Exchange Fluctuations • Reporting currency / functional currency / local • Translation = exchange rate exposure • Accounting for Gains and Losses  OCI • Remeasurement and translation • Temporal vs. All-current Method

  5. 3.8 Off-Balancing-Sheet Financing Objective and impact on financials Unconsolidated subsidiaries SPEs Operating / Capital Leases Factoring A/R = collection costs

  6. 3.9 US GAAP / IFRS • Cover major differences • Understand overall context and objectives • Revenue/Expense recognition • R&D costs • FIFO / LIFO (no LIFO in IRFS) • Leases • Impairment of Assets • Extraordinary Items

  7. 3.10 Fair Value Accounting Historical cost/current cost/market value Net realizable value/NPV(discounted CF) Fair value

  8. ESSAY TIPS • Time Management • Quant/Qual content • No spreadsheet = easy calculations • Don’t get “caught up” on the order of ? • Demonstrate ability to become a CMA • High sense of Integrity / Ethics • Facts / Formulate opinion / recommendation • No right / wrong solution = up for debate (depends)

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