Deck 13: Malignancy Disorders and Testing

Question 1

What are the pros and cons of using the strategic audit as a framework for case analysis?

Answer 1

The advantages of using the strategic audit are presented clearly in the chapter. Its limitations are, however, not so obvious. Like everything else in the world, a technique's strengths can also serve as its weaknesses. For example, Chapter 1 states that the strategic audit provides a checklist of questions, by area or issue, that enables a systematic analysis of various corporate activities to be made. The problem with any checklist is that the user may tend to use it almost automatically. Even though all the questions in the audit may not be relevant to a specific situation, a person may unthinkingly use them without considering that there may be other, perhaps more important questions that need to be raised but are not on the list of questions.
The value of asking this question is to get students to realize that the strategic audit is only a tool to help them organize their analysis. Use this question as an opportunity to remind them that it is up to them to develop whatever questions are most appropriate to the case under consideration and not to do their analysis on "automatic pilot."x

Question 2

When is inflation an important issue in conducting case analysis? Why bother?

Answer 2

The impact of inflation upon daily life strikes a person when watching old movies on television. For example, in the movie The Man in the Grey Flannel Suit, the character played by Gregory Peck works in public relations for a corporation located in New York City in the mid-1950s. He was earning $7,000 and was being interviewed by the president of a large radio/television network for an important job paying $9,000. By 2005, earning only $9,000 in New York City would not even keep a family above the poverty level. If the movie were done now, the character played by Gregory Peck would be demanding ten times that amount! Fifty years of inflation make a big difference.
Adjusting for inflation is very useful when the case being analyzed takes place over a time period when there was a great deal of inflation. The danger in ignoring inflation when doing financial analysis is that one can miss key data signaling a corporation's slow decline over time. Chief executive officers wish to keep their jobs and will tend to bias figures in their favor, especially in annual reports. Sales and profits stated in current or historical dollars (or whatever currency is being used) may seem to show substantial growth, but when they're converted to constant dollars (or whatever currency is being used), they may show a steady decline.
There are two methods of adjusting for inflation. One is to use whatever base year is being used in that country. In the United States, 1967 has been used as the base year for many years. It equaled 100 and other years were adjusted around it. Given that in the United States (like any other country), politicians dislike people seeing how much inflation has been occurring, a new, more recent base year (1982-84) has been selected to replace 1967-a simple, but insidious disguise. Dividing sales and net income by the CPI factor in Table 13.2 for a particular year will change the reported figures to 1982-84 constant dollars. Another approach is to adjust previous years in a financial statement using the most recent year as the base year, again using an index of inflation like the Consumer Price Index (CPI). Divide the CPI factors for the other years by the one for the most recent year to obtain the appropriate adjustment factors to use in dividing into the reported figures for the previous years.

Question 3

What ratios would you use to begin your analysis of a case?

Answer 3

In order to analyze a case, we must examine some of the most important financial rations. These would include liquidity ratios, profitability ratios, activity ratios, and leverage ratios.

Question 4

Why should one begin a case analysis with a financial analysis? When are other approaches appropriate?

Question 5

What are the five crucial steps to follow in basic financial analysis?

Question 6

Discuss the importance of the common-size financial statements in strategic evaluation and control process.

Question 7

Why is strategic audit recommended in case study analysis for students?

Question 8

Financial statement analysis is considered useful for students in handling and analyzing case studies. Is this true? Why?