Acct 5906 Final Notes

Q1 WEEK 5 requires a basic understanding of financial statement (ratio) analysis and how transactions impact on financial statement. (w1-w5)

Ratio analysis

Q: Why the risk level of the company increases when debt increases?

A: Because debt has to be repaid during the year, while dividends are a general option depending on the company’s financial situation. A company will bankrupt if it cannot repay the debt. 由于债务在年内必须偿还，而股息是一般的期权，取决于公司的财务状况。 如果公司无法偿还债务，公司将破产。

Q: Explain the benefits of increasing debt that can offset the downside of the increasing risk level.

A: Debt provides a cheaper form of finance because: (1) the bank will normally require a lower rate of return than shareholders as they normally have a security (e.g. company building) attached to the loan and are therefore taking less risk; (2) bank interest is tax deductible. 债务提供了一种较便宜的融资方式，因为：（1）银行一般要求股东的回报率低于股东，因为他们通常拥有与贷款相关的担保（如公司建筑），因此风险较小; （2）银行利息是可扣税的。

Q: Why you would want the financial statements to be audited?

A: An audit gives independent assurance that the financial statements give a true and fair representation of the company’s financial position and results of operations. With this independent assurance we feel more comfortable making a decision. 审计提供独立保证，财务报表真实，公正地代表了公司的财务状况和经营成果。 凭借这种独立的保证，我们感到更舒服做出决定。

Q2 Investment decision making

Traditional methods of capital investment evaluation

1. Accounting rate of return (ARR)

Advantages: (1) It’s simple to calculate and easy to understand; (2) It’s familiar to managers, investors and other external users of financial statements, who use profit and ROA to assess the performance of management. （1）计算简单易懂; （2）管理人员，投资者和其他外部使用者熟悉财务报表，利用利润和居留权来评估管理绩效。

Disadvantages: (1) It ignores the time value of money; (2) alternative formula used may generate different rates of return and lead to different recommendations