Understanding of theory

apply concepts and theories discussed in the course to practical issues.
The paper should include the theories or concepts discussed in the course. For example, you may relate theories discussed in class which either confirm or contradict or expand upon the material
you find in the public domain.
Grading will be based on the following criteria:
• Identification of relevant theories
• Understanding of theory
• Appropriate application of theory to the company
• Conclusions
• Use of relevant theories from throughout the course (See Note 1 below for details)
Note 1 – there is not set amount of theories that you need to include in your paper; however, you are required at a minimum to apply at least one theory from the material covered pre
midterm (Chapters 1 – 5), and at least one theory from the material covered post midterm (Chapters 6 – 11).
Materials to use: Use the 10K Annual report and textbook
Sample excerpt of final paper (Note this is only a portion of a paper and is a hypothetical company so no references have been added to this, your paper should include references to the
sources of information and ensure that you have met the requirements as noted above):
ABC’s share value has been on the downward trend. A component of ERC that explains the declining share price is earnings quality. When looking at earnings quality, and more specifically earnings persistence, ABC has volatile income and it is on a negative trend.
Another factor impacting earnings quality is that the reported income is different from investors’ expectations. For example, ABC’s CEO stated in an interview in July of 2020: “we expect to see profitability for the company within the six to 12 months”. This
‘good news’ information kept people investing in the company. However, when the 2020 financial statements were released with a significant loss (i.e. 'bad news’), investors lost confidence in ABC, they revised their estimates of the future state and there was a
corresponding decline in share price of ABC. Despite the bad news story as discussed in the preceding paragraph, ABC has other characteristics that support a ‘good news’ story for investors and potential investors. ABC has explained in their annual report that their higher expenses and greater losses is due to growth initiatives and product development under their strategic plan to grow their business organically. The significant losses present ‘bad news’ to the market; however, it could also be a sign of ‘good news’ for future years as they are investing in future growth. Using the Valuation Approach to Financial Reporting many of these investment in future growth would be reported as assets on the balance sheet, not expenses that reduce income at the transaction date. The company discusses the impact of the product development during 2020 in their Management Discussion and
Analysis and noted that there were non recurring research expenses of $5m related to development of a new product line that had been expensed in the year that is not expected to re-occur in 2021. Investors can use this information to revise their beliefs about the future state of ABC and make investment decisions based on their revised beliefs.