Finance

21

CHAPTER 2 Data for Financial Decision Making

QUESTIONS

1. Why is it critical to have theory prior to collecting data about a company? Theory identifies the variables that are relevant to understanding a company. Without theory, we can not be sure that we are collecting the right information, we cannot know if we are analyzing the information we have collected correctly, and we cannot know how to interpret the results of our analyses. 2. Why is it often difficult to compare the financial statements of similar companies? There is enough flexibility in Generally Accepted Accounting Principles so that two otherwise identical companies can produce significantly different financial statements. Areas in which the ability to select alternative accounting treatments often makes comparisons difficult are the timing of the recognition of revenues, depreciation methods, and inventory methods. Even where accounting alternatives are not available, many companies structure their activities so they can use a favorable accounting treatment. Examples are the recording of leases, and mergers and acquisitions. Big differences in financial statements may reflect relatively small differences between the companies. Small (or no) differences between companies may be hidden by accounting differences that make the companies appear not at all alike. 3. You have just learned that a company has 10,000 employees and have been asked to determine if this is good or bad. What would you like to learn to make that judgment? It is impossible to make this determination without at least one other piece of data since one number taken out of context is almost always meaningless. Other data that might provide some context are the company's product types and mix, number of customers, skills required by employees, total revenues, total costs, number of facilities, geographic dispersion of facilities, etc. 4. Why is competitive benchmarking superseding traditional benchmarking? Traditional...