Accounting and financial analysis

[Chapter Introduction and Objectives]: Although regulations limit managerial discretion in financial reporting, managers still have leeway in choosing accounting policies. Consequently, analysts are required to make adjustments to reported results in order to make meaningful comparison of performance of different companies. This chapter highlights the issues in accounting analysis. The chapter also covers techniques of financial analysis like ratio analysis. This chapter has the following objectives: • Highlight building blocks of accrual accounting • Highlight why managers make changes in accounting policies • Highlight factors affecting accounting quality • Discuss ratio analysis • Introduce sustainable growth analysis Shares in troubled healthcare software provider iSoft Group, PIc. fell over 25% in morning trading after the company announced that annual profits would be lower than forecast due to a change in accounting policy (iSoft Shares Slump Again on Accounting Policy Change, 2006). Manchester, UK-based iSoft said that, under a new accounting policy for revenue recognition, pretax profit for the year to 30 April 2006 would be between £3 million ($5.5 million) and £7 million ($12.9 million), compared to earlier estimates of between £I 7 million ($31.4 million) and £22 million ($40.7 million). The company also lowered its guidance for annual sales to between £195 million ($360.5 million) and £200 million ($369.7 million) from earlier forecasts in the range £210 million ($388.2 million) and £215 million ($397.5 million). iSoft said that it was looking to reduce operating costs by around £30 million ($55.5 million) by the end of the current financial year, and as a result it was planning to cut around 150 staff from its UK operation, representing about 15% of total headcount in the UK. The company estimated the cost of this action at around £3 million ($5.5 million). Over the last 6 months, iSoft has been beset by concerns over its contracts with the UK National Health Service. The company is the main ...