Assess the degree to which the firm’s accounting reflects the underlying business reality. Identify accounting distortions and evaluate their impact on profits and the sustainability of profits.
Financial statements are used to determine the business activities of a firm and the role of accounting analysis is to determine the accuracy and quality of the information provided. This analysis would look into the degree of its accounting figures captures its business reality through the policies used and its resulting noise, potential forecast errors and its impact on Myer’s profit.
A few critical areas which are vital to Myers business which includes credit losses, quality of net accounts receivable, inventory …show more content…
In order for manager to get the benefit from the incentive, manager must make sure the business performance meet the price hurdles or the sales target. Therefore, there is an incentive for manager to manipulate in amortisation expense such as make it lower during the tough economy to make the profit looks good.
Brand names and trademarks
In conclusion, Myer have used policies that reflect its business reality and shows little distortion. It indicates that management and auditors have followed the proper procedures and should be able maintain a sustainable profit.
2. Financial Analysis
The purpose of financial analysis is to rearrange information in the financial statements for better understanding the firm’s activities. This is done through the process of reformatting the statement of financial position, the statement of financial performance and the statement of cash flows.
2.1 Ratio analysis
Return on equity (ROE)
ROE is used to measure the overall performance of a firm and hence determine its value. The value is identified by the ability of the company to generate a return greater than its cost of capital. During the period of 2008-2011 financial years, ROE of Myer was estimated to