I just want to confirm something about the wording of the various LOS’. For example: Earnings Quality Issues and Financial Ratio Analysis LOS 25b- Describe the relation between the level of accruals and the persistence of earnings and the relative multiples that the cash and accrual components of earnings should rationally receive in valuation. I’ve been under the impression that when the term ‘describe’ is used, we’re only responsible for qualitative knowledge. That would mean that I need to what the accrual component of earnings is, and why it should receive a lesser weighting than the cash component, but I would NOT be required to calcuate the actual amounts. Is this correct? The calculation isn’t that difficult, but it’s another thing to remember on an already staggeringly long list.
My question is still valid, although I should point out the accrual calculation is included in the ‘compare and contrast’ the earnings quality of peer companies in LOS 25d. Damn.
You are right on the word “describe” in the curriculum. Best case is in Cash vs. Synthetic CDO. You don’t have to know how to calculate, only describe the differences and the tranches. For earning quality I would know how to calculate the accruals using the B/S and Cash Flow method and then put into ratio. Also know how to describe the number in terms of high/low or quality. Know how to describe differences in cash vs. accrual and which is better for forecast… Hope this helps, not much quanitative analysis needed in this section. Your right, know the relationships and differences.