MIT 15 535 - How Companies Cook the Books (14 pages)

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How Companies Cook the Books



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How Companies Cook the Books

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Pages:
14
School:
Massachusetts Institute of Technology
Course:
15 535 - Business Analysis Using Financial Statements

Unformatted text preview:

Class 7 How Companies Cook the Books 15 535 Class 7 1 Announcements Optional Review Session for Quiz 1 Tentatively scheduled for Wednesday March 5 Quiz 1 In Class on Thursday March 6 The quiz will be approximately 50 minutes long Team Projects Provide hints guidance today and during Tuesday s class E mail me and your due diligence counterparty part 1 of your Team s Project Report by noon on Friday March 7 I will be in on Sunday starting by noon to answer questions about Part I of the project 15 535 Class 7 2 Guidance on Part I of Project Cash Flow Projections Earnings Quality Provide an descriptive analysis of your company its strategy for generating profit cashflow growth potential competition technological risks etc Ie How cashflows will be generated Then based on this strategic analysis use techniques we discussed in class and for the Dell case to provide estimates of FCFE for Current Year Next 5 Years Years 5 10 or 20 If necessary Cash flows in perpetuity growing perpetuity 15 535 Class 7 3 Guidance on Part I of Project Cash Flow Projections Earnings Quality Provide robustness analysis CF projections Differing growth rate estimates Different assumptions on Working Capital Accruals CapEx Depreciation Financing changes Analyze Earnings Quality using discussed in this and next class techniques Excessive accruals Wedge between CFO and Operating Income Growth in receivables that exceeds growth in sales Aggressive accounting techniques compared to competitors SEE PROJECTS FROM PRIOR YEARS ON WEB 15 535 Class 7 4 Cooking the books and earnings management manipulation Central theme Firms managers often have incentives to misstate earnings balance sheet items Contracting incentives Avoid violating accounting covenants in loan agreements Avoid taxation Progressive tax scheme Maximize bonus managers Avoid regulatory government union intervention understate profits Avoid detection of managerial shirking or outright stealing Stock market incentives Meet analysts targets



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