Question
Consider two manufacturing companies of electrical devices with identical business fundamentals. Everything is the same for these two companies (same operations, same economic fundamentals, same
Consider two manufacturing companies of electrical devices with identical business fundamentals. Everything is the same for these two companies (same operations, same economic fundamentals, same suppliers, same customers and same managers). The only difference is in the way the two companies choose to report their financials. Company A follows a conservative financial reporting strategy by choosing accounting policies that report the lowest revenue and assets and the highest expense and liabilities. Company B follows an aggressive financial reporting strategy by choosing accounting policies that report the highest revenue and assets and the lowest expense and liabilities. Required: (a) Explain how you can discover information that one company is being conservative in financial reporting and the other company is being aggressive in financial reporting. You are required to give specific examples that are directly relevant to the context of these two companies being manufacturing companies of electrical devices. (b) Explain how you could use this newly discovered information that a company is conservative or aggressive in reporting in active investing.
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