Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 21 views

    2 T

    Uploaded by

    Joe Dickson
    Managers have discretion in preparing financial statements due to choices between accounting rules and estimates required. Forces that limit management discretion include SEC oversight, auditing, and corporate governance structures. There has been a move from historical cost accounting, which records assets at original values, toward fair value accounting which records assets at current market prices to improve financial statement usefulness. Conservatism in accounting involves selecting the least optimistic valuation option to offset management bias and highlight downside risk for creditors.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd

    2 T

    Uploaded by

    Joe Dickson
    21 views2 pages
    Managers have discretion in preparing financial statements due to choices between accounting rules and estimates required. Forces that limit management discretion include SEC oversight, auditing, and corporate governance structures. There has been a move from historical cost accounting, which records assets at original values, toward fair value accounting which records assets at current market prices to improve financial statement usefulness. Conservatism in accounting involves selecting the least optimistic valuation option to offset management bias and highlight downside risk for creditors.

    Original Title

    2_t_

    Copyright

    © © All Rights Reserved

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Managers have discretion in preparing financial statements due to choices between accounting rules and estimates required. Forces that limit management discretion include SEC oversight, auditing, and corporate governance structures. There has been a move from historical cost accounting, which records assets at original values, toward fair value accounting which records assets at current market prices to improve financial statement usefulness. Conservatism in accounting involves selecting the least optimistic valuation option to offset management bias and highlight downside risk for creditors.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    21 views2 pages

    2 T

    Uploaded by

    Joe Dickson
    Managers have discretion in preparing financial statements due to choices between accounting rules and estimates required. Forces that limit management discretion include SEC oversight, auditing, and corporate governance structures. There has been a move from historical cost accounting, which records assets at original values, toward fair value accounting which records assets at current market prices to improve financial statement usefulness. Conservatism in accounting involves selecting the least optimistic valuation option to offset management bias and highlight downside risk for creditors.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    You are on page 1of 2

    2-7 Describe factors that bring about managerial discretion for preparing

    financial statements

    - Managers have discretion in financial reporting in most cases. This


    discretion may result from either of two sources. First, managers
    often have a choice between alternative generally accepted rules in
    accounting for certain transactions. Second, managers often have
    to make estimates of uncertain future outcomes. Each of these
    managerial judgments creates managerial discretion.

    2.8 Describe forces that serve to limit the ability of management to manage
    financial statements.

    - Monitoring and control mechanisms include SEC oversight, internal


    and external auditor review, corporate governance such as Board of
    Director subcommittees assembled to oversee the audit and
    financial reporting, and the omnipresent threat of litigation.

    2-11 Explain historical cost and fair value models of accounting. What
    explains the move toward fair value accounting.

    - Under the historical cost model, asset and liability values are
    determined based on prices obtained from actual transactions that
    have occurred in the past. Under the fair value accounting model,
    asset and liability values are determined on the basis of their fair
    values (typically market prices) on the measurement date (i.e.,
    approximately the date of the financial statements).
    - Under historical cost method, when asset (or liability) values
    subsequently change, continuing to record value at the historical
    cost—i.e., at the value at which the asset was originally purchased—
    impairs the usefulness of the financial statements, in particular the
    balance sheet. Because of this the historical cost model has come
    under a lot of criticism for various quarters, resulting in the move
    toward fair value accounting.

    2-12 What is conservatism? What are its advantages?

    - In accounting, conservatism states that when choosing between two


    solutions, the one that will be least likely to overstate assets and
    income should be selected. The two main advantages of
    conservatism are that (1) it naturally offsets the optimistic bias on
    the part of management to report higher income or higher net
    assets; and (2) it is important for credit analysis and debt
    contracting because creditors prefer financial statements that
    highlight downside risk.
    2-17 Describe the criteria necessary for a business to record revenue.

    - Accrual accounting calls for recognizing revenue when the revenue


    is both earned and realizable. Revenues are earned when the
    company delivers the products or services. Revenues are realized
    when cash is received. Revenues are realizable when an asset is
    acquired for the products or services delivered that is convertible
    into cash or cash equivalents. The asset received is usually an
    account receivable that is collectible.

    2-18 Explain when costs should be recognized as expenses.

    - Accrual accounting requires that the economic efforts required to


    generate revenues be matched against the related revenues. As a
    result, product costs are recognized in the period the related goods
    are sold. Period costs are matched with revenues of the same
    period.

    2-45 What is accounting analysis? Explain.

    - Accounting analysis is the process of evaluating the extent to which


    a company’s accounting numbers reflect economic reality. The
    process involves a number of different tasks, such as evaluating a
    company’s accounting risk and earnings quality, estimating earning
    power, and making necessary adjustments to financial statements to
    both better reflect economic reality and assist in financial analysis.

    - Accounting distortions are deviations of reported information in


    financial statements from the underlying business reality. These
    distortions arise from accounting policy choices, errors in
    estimation, the trade-off between relevance and reliability, and the
    latitude in application.

    You might also like