J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

Accounting AnalysisFinancial statements are prepared to provide shareholders andother potential investors with a more informative view as to the value of acompany. They are designed to answer the fundamental questions of how thebusiness is currently performing and what its future prospects are. By answeringthese questions, these financial statements offer the company’s investors withinformation needed to make informed decisions, whether it be to invest in thecompany or finance the firm’s future endeavors. The accounting analysis mustbe done with a healthy level of skepticism due to the flexibility provided by theGenerally Accepted Accounting Practices (GAAP). Management has been giventhis discretion in order to give a more informative and clearer understanding oftheir company. This leads to estimates and assumptions involving judgment thatcould lead to some errors. An accounting analysis is a tool used by financialanalysts to investigate the extent of these errors. It is used to determine theaccuracy of the statements provided by financial managers of a particular firm.The accounting analysis process consists of six steps. First, the keyaccounting policies must be identified. These policies are used to measure thefirm’s key success factors and its potential risks. “A critical accounting policy is apolicy for a company of an industry which is considered to have a notably highsubjective element, and that has a material impact on the financial statements”(www.wikipedia.com). Next, an assessment of accounting flexibility allowed byGAAP must be performed. Not every company has equal amounts of flexibilitywhen deciding upon which key accounting policies to utilize. Therefore, thisflexibility must be looked into and addressed. Once the accounting flexibility isdetermined, an evaluation of the firm’s accounting strategy is conducted. Thisevaluation determines how consistent the firm’s accounting policies are with itscompetitors. It also looks into the financial managers’ incentive base, whetherthe firm has recently changed or altered its policies, and if any business40