Qian, who has just completed his first finance course, is unsure whether he should take a course in business analysis and valuation using financial statements because he believes that financial analysis adds little value, given the efficiency of capital markets. Explain to Qian when financial analysis can add value, even if capital markets are efficient.
An efficient capital market is a market which the share prices reflect new information accurately and in the real time. However, there is no strong-form efficiency in capital market, so asymmetric information still exist in the real world of investment. For example, if firms would like to raise fund by offering shares to public, some information which they communicate to investors may not be credible because they would like to attract investors by overstating their business. Furthermore, firms usually have better information than investors on the value of business, so it is quite unfair if the information provided to investors is only scope of what firms want they to know. However, there is some method to decrease level of asymmetric information effect. Financial statement analysis can be used by financial intermediaries such as managed fund and investors to make a decision whether they should invest their money rather than depend on just information provided by firms. In addition, information intermediaries such as external auditor can confirm about quality of creditability of financial information. Therefore, it can be seen that financial analysis can add value to capital market investment decision because it help investor distinguish between good and bad investment opportunities.
Accounting statements rarely report financial performance without error. List three types of errors that can arise in financial reporting.
There are some kind of common mistake which are usually seen in financial reports. The first one is improper value of fixed asset. Error in net book value of fixed asset can...
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