The IUP Journal of Accounting Research and Audit Practices:
The Effect of Accounting Framework on the Utility of Fundamental Tools

Article Details
Pub. Date : Apr, 2020
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP40420
Author Name : Diwahar S Nadar, Bharti Wadhwa
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 20

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Abstract

The accounting framework of any economy is the bedrock on which the financial statements are crafted. The financial statements so created are the core of fundamental analysis. The information from financials is used as inputs for various fundamental tools. These fundamental tools aid in value investing, insolvency prediction and earnings management, amongst others. Thus, the accounting framework of an economy would be indirectly influencing the outcome of fundamental analysis. The present paper, in a sectional manner, studies the effect of accounting standards and accounting policies on 10 selected fundamental tools. In the first section, using the Indian FMCG sector as a proxy, the study uses the company's financials based on old and new accounting standards. With the aid of Total Proportionality Index and Wilcoxon signed rank test, the effect of accounting standard is assessed. In the second section, by using a dummy 11-year financial model and applying Wilcoxon signed rank test, the effect of accounting policies in three areas depreciation method, PPE valuation method and inventory valuation method are assessed. Based on the significance level of impact, the most robust fundamental tool is identified in each section.


Description

In the latter half of the 19th century, research based on capital market and accounting information revealed the invalidity of the efficient market hypothesis and market anomalies (Lev, 1989; Ball, 1992; and Abad et al., 2004). The required information about a company can come only from a full and comprehensive analysis of a business entity, an analysis that encompasses thoroughly and fully all aspects of the strength and weaknesses as well as the possible rewards and risks of a given situation (Bernstein, 1975; and Lev and Thiagarajan, 1993).


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