We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Business Analysis and Valuation

essay
The whole doc is available only for registered users

A limited time offer! Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

1.A finance student states, “I don’t understand why anyone pays any attention  to accounting earnings numbers, given that a ‘clean’ number like cash from operations is readily available.” Do you agree? Why or why not? There are several reasons why we should pay attention to accounting earnings numbers.

First, net income predicts a company’s future cash flow better than current cash flow does.

Second, net income is potentially informative when there is information asymmetry between corporate managers and outside investors.

Question 5(a). If management reports truthfully, what economic events are likely to prompt the following accounting changes?

Increase in the estimated life of depreciable assets. Managers may increase the estimated life of depreciable assets when they realize that the assets are likely to last longer than was initially expected.

Decrease in the uncollectibles allowance as a percentage of gross receivables. The firm’s change of customer focus may prompt managers to decrease the allowance for uncollectible receivables.

Recognition of revenues at the point of delivery, rather than at the point cash is received. Revenues can be recognized when the customer is expected to pay cash with a reasonable degree of certainty.

Capitalization of a higher proportion of software R&D costs. According to SFAS No. 86, costs incurred on software development after the establishment of technical feasibility and commercial feasibility are to be capitalized.

Question 5(b). What features of accounting, if any, would make it costly for dishonest managers to make the same changes without any corresponding economic changes?

Third-Party Certification. Public companies are required to get third-party certification (auditor’s opinion) on their financial statements. Unless the accounting policy changes are reasonably consistent with underlying economic changes, auditors would not provide clean auditor’s opinion.

Reversal Effect. Aggressive accounting choices may inflate net income in the current period but they hurt future net income due to the nature of accrual reversal.

Investors’ Lawsuit. If a company disclosed false or misleading financial information and investors incurred a loss by relying on that information, the company may have to pay legal penalties.

Labor Market Discipline. The labor market for managers is likely to penalize individuals who are perceived to be unreliable in their dealings with external parties.

Related Topics

We can write a custom essay

According to Your Specific Requirements

Order an essay
icon
300+
Materials Daily
icon
100,000+ Subjects
2000+ Topics
icon
Free Plagiarism
Checker
icon
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access
immediately?

Your Answer Is Very Helpful For Us
Thank You A Lot!

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59