Investment Analysis

Table of Contents
UNIT 1 2
DQ1 2
DQ2: Describe the relationship between risk and return 4
DQ 3How can we use the Modified Altman and Modified Chanos algorithms to detect inflection points in determining leverage shifts? 5
UNIT 2 7
DQ 1: Describe the concept behind an efficient capital market. 7
DQ 2: Do you believe we have efficient capital markets? 8
DQ 3: What are the four required financial statements under IFRS and GAAP? 8
DQ 4: How do some managers improperly manipulate revenue and earnings 9
References 11

UNIT 1
DQ1
The recent financial reporting failures that have come to the foreground are due to the following factors. The write-up discusses why such failures took place and also gives examples for the same.
Inaccurate accounting
Financial reporting failures begin with inaccurate reporting at the preparation level itself. Be it deliberate or unknowing, the firms’ failure to prepare financial statements accurately is putting stability and future of the financial world in jeopardy (Bhattacharya, 2006). Grant Thornton’s analysis of the financial statements of 49 law companies belonging to the UK market has revealed that 20 percent of these companies have such accounting policies that conflict with the treatment of figures in the profit and loss account and balance sheet, while a further 10% are unclear because of inadequate narratives, according to a new report released on 22 November 2010 (Grant Thornton, 2010). Such a poor level of reporting has potential effect on banking relationships and funding opportunities of the subject companies.
Lack of internal controls
Lack of internal controls has had severely negative effect on financial reporting levels in the recent past. A glaring example of this is the 10-K filed by Costco Wholesale in Oct 16, 2009, where it clearly accepts that fact