ACCT6003 Fundamental Analysis for Equity Investment
Week 8 Assignment on financial reporting analysis
For this weekly assignment, you were required to demonstrate critical thinking in addressing the following two questions.
Question 1
Consider the following thought experiment. There are two competing software development start-up companies that develop identical software. One of these companies is listed on the Australian Stock Exchange and the other one is listed on the New York Stock Exchange. The two companies do not manufacture anything and carry no inventory. They also have no material property, plant or equipment, so PPE is not a consideration at all. Also, the two companies sell only in cash and pay only in cash to all suppliers and buy assets in cash using annual equity injections. Assume that the two companies have completely identical business fundamentals in all operational and financing aspects. They have identical products and services, research and development operations, fixed assets, cost of capital, leverage, credit ratings, suppliers, customers, software engineers, shareholders, debtholders, and managers. The only difference between the two companies is the way in which they do their accounting.
• Company A publishes reports in Australia and follows the most conservative financial reporting strategy possible, by choosing accounting policies that would report the lowest possible revenue and assets and the highest possible expense and liabilities.
• Company B publishes reports in the US and follows the most aggressive financial reporting strategy possible, by choosing accounting policies that would report the highest possible revenue and assets and the lowest possible expense and liabilities.
Required:
(a) Explain the differences between the two companies described in the thought experiment with respect to their financial reporting. Also explain how you would approach the problem of comparing the performance of these two companies. [2 marks]
(b) Explain how the knowledge that a technology start-up company follows a conservative or aggressive financial reporting strategy can be used to add value to an investor’s investment strategy. Present evidence to support your arguments. [1 marks]
The word limit to answering Question 1 is 300 words, excluding any references, tables of graphs.
Question 2
For the company that you have been assigned to analyse in the Final Take-Home Project, discover evidence and present an analysis that demonstrates whether your company follows a conservative or an aggressive financial reporting strategy. It is entirely up to you how to approach the analysis of this question. [3 marks]
The word limit to answering Question 2 is 300 words, excluding any references, tables of graphs.