Overview of accounting analysis Essay

1. A finance schoolchild states, I dont understand why any angiotensin converting enzyme pays any attention to method of business relationship earnings numbers, effrontery that a clean number like cash from operations is readily available. Do you agree? wherefore or why non?I disagree with the finance student, beca white plague net income forecasts future cash move and is informative.a. Net income forecasts future cash flow better than authentic cash flow, and does so by arrangement transactions associated with cash consequences when the transactions occur, rather than when the cash is received or paid. To compute net income, the prove of economic transactions atomic number 18 recorded on the basis of expected, not necessarily actual, cash returns and stipends.b. Net income is informative when collective managers have better information than outside investors. Corporate managers use accruement rather than cash accounting to prepare monetary describe and determine ne t income. Since accrual accounting helps managers to record past events and forecast future events, net income gives superior information.2. Fred argues The standards that I like most are the ones that eliminate all management free ordain in reportage that way I get equal numbers across all companies and dont have to worry about doing accounting outline. Do you agree? Why or why not?I disagree with Fred, because the elimination of committee of reporting to management leave alone create chaos and misinterpretation of financial statements. Corporate managers know how to hold back and judge business transactions using the accrual accounting framework. They have inside information and distinguish appropriate judgments to convey that information to investors and forecast future performance. If this discretion is eliminated, managers leave alone be unable to relieve oneself use of inside information in reported financial statements.However, since investors view profits as a mea true of a managers performance, some managers have an incentive to use their accountingdiscretion to distort reported profits by making biased assumptions. Also, the use of accounting numbers in contracts mingled with the firm and outsiders provides a motivation for management manipulation of accounting numbers. Therefore, the delegation of financial reporting decisions to managers has both be and benefits. Accounting rules and auditing are mechanisms deigned to reduce the cost and preserve the benefit of delegating financial reporting to corporate managers.3. Bill Simon says, We should get rid of the FASB and unsweet, since free food market forces will make sure that companies report reliable information. Do you agree? Why or why not?Free market forces do not make sure that all companies report reliable information. Bill assumes that corporate managers do not disclose unreliable information and that they share inside information with outside investors. In received life, manag ers disclose false information and investors dont detect inside information right away. Therefore, FASB and SEC force managers to disclose reliable information and comply reasonably with U.S. GAAP standards.4. Many firms recognize revenues at the heading of shipment. This provides an incentive to accelerate revenues by shipping unslopeds at the block off of the quarter. Consider two companies, one of which ships its products evenly throughout the quarter, and the second of which ships all its products in the last two weeks of the quarter. Each orders customers pay 30 days after receiving shipment. Using accounting ratios, how can you distinguish these companies?Both companies will have the same amount of revenues and expenses in their income statements. However, their balance sheets will show different amounts. At the end of each quarter, the conjunction that ships its products evenly throughout the quarter should have higher cash and a demoralize accounts receivable balance t han the company that ships all its products in the last two weeks of the quarter.We can distinguish between these companies using the sideline accountingratiosa. Accounts Receivable Turnover Ratio = SalesAccounts ReceivableThe company that ships its products evenly throughout the quarter and has steady gross sales will have a higher accounts receivable swage ratio.b. Accounts Receivable Days Ratio = Accounts ReceivableAverage Sales per DayThe company that ships its products evenly throughout the quarter and has steady sales will have a lower accounts receivable days ratio.c. bullion Ratio = Cash + Short-Term InvestmentsCurrent LiabilitiesThe company that ships its products evenly throughout the quarter and has steady sales will have a higher cash ratio.5. A. If management reports truthfully, what economic events are likely to barrack the following accounting changes?a. Increase in the estimated life of depreciable assets.If managers find out that the actual life of the deprecia ble assets lasted perennial than was expected, managers will increase the estimated life of depreciable assets.b. Decrease in the uncollectible allowance as a role of gross receivables. The firm will decrease the percentage of uncollectable allowance when it receives orders from reliable customers. In contrast, the firm will increase the percentage of uncollectable allowance when it receives orders from unreliable customers.c. Recognition of revenues at the refer of delivery, rather than at the pointcash is received. A firm could recognize revenues at the point of delivery rather than at the point of cash receipt when its customers credit improves or its customers cash payment is not a happen.d. Capitalization of a higher proportion of software R&D costs. A firm will capitalize a higher proportion of software R&D costs when the firm has established the technical and commercial message feasibility of the asset for sale or use. For example, technical and commercial feasibility ma y be established when the firm completes the software and either uses it or sells it and is able to abut how the intangible asset will generate future economic benefits.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?Opinion of third parties. Auditors provide a clean sagaciousness of a firms financial statements. If the changes in the accounting policy are reasonably agreeable with economic changes, auditors will not provide a clean opinion of the financial statements.Accrual thong effect. Aggressive capitalization of software R&D expenditures will increase net income in the current period, but the later writing-off of capitalized R&D costs will decrease net income in the following period.Lawsuit. If a firm discloses false financial information and its investor loses because of that information, the firm will pay legal penalties. trade union movement Market Discipline. The l abor market for managers will discipline those who are perceived as unreliable managers in dealing with external parties.6. The conservatism principle arises because of concerns about managements incentives to overstate the firms performance. Joe Banks argues We could get rid of conservatism and make accounting numbers more than useful if we delegated financial reporting to independent auditors, rather than tocorporate managers. Do you agree? Why or why not?I dont agree with Joe Banks, because if we delegate financial reporting to independent auditors rather than to corporate managers, we will decrease the quality of financial reporting. Auditors dont have all the inside information that corporate managers have when the economic reality of the firm is displayed. Furthermore, the way managers and auditors assess a firm is different. Auditors could apply accounting standards to assess business transactions in a mechanical way rather than using their professional judgment, leading to poor quality financial reporting. For example, everybody agrees that market- abide by accounting provides relevant information however, auditors are concerned more about the audit liability.7. A fund manager states I refuse to buy any company that makes a voluntary accounting change, since its certainly a case of management trying to fell bad news. Can you think of any alternative interpretation?Voluntary accounting change could expire because business circumstances have changed in the firm. For example, unusual increases in receivables capacity be due to changes in a firms sales strategy, or unusual decreases in the allowance for uncollectible receivables might be reflecting a change in a firms customer focus. Therefore, an analyst should use qualitative information such as the evaluation of the context of the business strategy and economic circumstances, and not deliberately interpret the firms accounting change as earnings manipulation.8. Fair value accounting attempts to make financial information more relevant to financial statement users, at the risk of greater subjectivity. What factors would you examine to evaluate the reliability of second-rate value assets?We should examine the fair value power structure to evaluate the reliability of fair value assets. Level 1 is the most reliable in toll of valuating fair value assets because it is based on quoted prices, like a closing stock price in the Wall Street Journal. Level 2 is the next most reliable and would rely on evaluating alike assets or liabilities in active marketsLevel 3 is the least reliable level because it requires a good deal of judgment and is based on the best information available (such as a companys own data or assumptions) to arrive at a relevant and reliable fair value measurement. Financial statement users can trust prices in liquid markets as long as observable inputs such as level 1 and 2 reflect quoted prices for identical assets or liabilities. In level 3, we encounter unobse rvable inputs.