This website uses cookies to ensure you have the best experience. Learn more

Chapter 4 Accounting Analysis

2450 words - 10 pages


Accountants define assets as resources that a firm owns or controls as a result of past business transactions, and which are expected to produce future economic benefits that can be measured with a reasonable degree of certainty.

Distortions in asset values generally arise because there is ambiguity about whether:
* The firm owns or controls the economic resources in question:
* Are the ventures controlled?
* Are the leased assets owned by the lessee or the lessor?
* Have the revenues resulting in the receivables been earned?
* The economic resources are likely to provide future economic benefits that can be measured with reasonable ...view middle of the document...

* Fair value estimates are accurate.
* One other use of fair value estimates is to adjust the book value of assets when firms use the revaluation method instead of the historical cost method. When doing so, firms must regularly assess whether the reported book values deviate too much from the assets’ fair values and, if necessary make adjustments. Although revaluation adjustments are recorded in the statement of comprehensive income (not in the income statement), revaluations do affect earnings through the depreciation expense because, under this method, depreciation is determined by reference to the assets’ fair value.
* Fair value estimates are also needed to calculate goodwill in business combinations. Specifically, the amount by which the acquisition cost exceeds the fair value of the acquired net assets is recorded on the balance sheet as goodwill. The international standard for business combinations (IFRS 3) requires that the amount of goodwill is not amortized but regularly tested for impairment. This may create the incentive for managers to understate the fair value of acquired net assets and, consequently, overstate goodwill.
* Finally, new international rules on the recognition and measurement of financial instruments (IFRS 9) require a firm to recognize equity investments and debt investments held for trading (rather than for the purpose of collecting contractual cash flows till maturity) at their fair values. With a few exceptions, changes in the fair value of such assets are immediately recognized in profit or loss

* To reduce management’s discretion in determining the fair value of financial assets:
* their values must be derived from quoted market prices if an active market for the assets exists (typically referred to as marking to market).
* If quoted market prices are not available, firms can use their own valuation technique to determine the assets’ fair values (referred to as marking to model); however, their valuation should be based on assumptions that outside market participants would reasonably make, not management’s own assumptions.

Opportunities for accounting adjustments can arise in these situations if:
* Accounting rules do not do a good job of capturing the firm’s economics.
* Managers use their discretion to distort the firm’s performance.
* There are legitimate differences in opinion between managers and analysts about economic uncertainties facing the firm that are reflected in asset values.

* Asset overstatements are likely to arise when managers have incentives to increase reported earnings. Thus, adjustments to assets also typically require adjustments to the income statement in the form of either increased expenses or reduced revenues.
* Asset understatements typically arise when managers have incentives to deflate reported earnings – Income smoothing
* When the firm is performing exceptionally well and...

Other Essays Like Chapter 4 - Accounting Analysis

Accounting Essay

566 words - 3 pages products and the analysis of variances, profitability or social use of funds” (Chartered Institute of Management Accountants - CIMA) “That which identities, defines, measures, reports and analyses the various elements of direct and indirect costs associated with producing and marketing goods and services. Cost accounting also measures performance, product quality and productivity” (Letricia Gayle Rayburn) “A systematic process of collecting

Accounting Thoery Essay

2074 words - 9 pages Financial Accounting Theory Chapter 8 – Summary The Positive Theory of Accounting 8.1 Outline In the text, Scott defines Positive accounting theory (PAT) as: “concerned with predicting such actions as the choices of accounting policies by firms and how firms will respond to proposed new accounting standards.” (263) PAT uses theory to predict the choices that management will make regarding their choice of accounting policies. This

Ccsi Final

893 words - 4 pages . |   | Instructor Explanation: | Chapter 9, Page 410 | | |   | | |   | | | | |  4. | Question : | (TCO 9) A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis? | |   | Student Answer: | |  Annual operating cost of the new equipment |   | | |  Annual operating cost of the old equipment |   | | |  Net cost of the new

Acc 291 Syllabus

1639 words - 7 pages flows, financial statement analysis, time value of money, payroll accounting, and other significant liabilities. Policies Faculty and students/learners will be held responsible for understanding and adhering to all policies contained within the following two documents: • University policies: You must be logged into the student website to view this document. • Instructor policies: This document is posted in the Course Materials forum

Acct 567 Devry Week One Homework

2986 words - 12 pages sales discounts |   | | | Recognizing full sales amount for partial shipments |   | | | All inflate sales ( ) |   | Instructor Explanation: | Chapter 4, page 4-28 | | |   | Points Received: | 4 of 4 |   | Comments: | | | | Question 11. | Question : | (TCO A) Horizontal analysis typically involves what? | |   | Student Answer: | | A) Comparison of companies by market share in the industry |   | | | B

Financial Statement Differentiation

898 words - 4 pages Financial Statement Differentiation Vaughan Thompson ACC/561: Accounting March 4, 2013 Venetia N. Pitts, MBA Financial Statement Differentiation It is difficult to envision investors, creditors, and management making informed decisions sans accurate financial information. Consequently, organizations should use financial statements to communicate their financial stability, cash flows, and operational results with external and internal

Costing Methods

2818 words - 12 pages function of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing, planning and control. 4. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the budgeted costs and fixation of responsibility for cost increases. Notes 96 ACCOUNTANCY Cost Accounting : An Introduction 5. Cost comparisons: Cost accounting also includes comparisons between

Phase 1 Discussion Board

1054 words - 5 pages occurred. Here is an example: | Vertical Analysis Example [pic] References Accounting Coach Quizlet Chronl.

Acc 400- Week 2: E-Text Individual Assignments

584 words - 3 pages Week 2: E-text Individual Assignments ACC/400 Week 2: E-text Individual Assignments Financial Accounting: Tools for Business Decision Making, 4th edition Chapter 8: Question 3 3. What are the essential features of the allowance method of accounting for bad debts? According to Kimmel, Weygandt, & Kieso (2007), the allowance method of accounting has three essential features: 1. Estimated uncollectible accounts receivable

Bus520 Chapter 15 & 16

1084 words - 5 pages Chapter 15: Understanding Accounting and Financial Statements Introduction The purpose of this chapter is to identify some of the concepts of Understanding Accounting and Financial Statements in the business world. Learning objectives 1. Explain the functions of accounting, and identify the three basic activities involving accounting. 2. Describe he roles played by public, management, government, and not-for-profit accountants. 3

Development of Accounting Practices in Austrailia

1896 words - 8 pages period, should be stated in the financial report to assist accounting users in making decision. The chapter 2 in the IFRS framework is about reporting entity. The chapter 3 talks about identifying the qualitative characteristics of accounting information such as the comparable, verifiable, timely and understandable of accounting information. In chapter 4, the IFRS framework declared that businesses are underlying the concept of going concern and

Related Papers

Main Financial Statements And Steps In Performing Accouting Analysis

807 words - 4 pages financial statements the bank should examine first to answer the question. If appropriate, also indicate which other financial statement(s) would provide further support for the answer. Steps in performing accounting analysis Accounting analysis The purpose of accounting analysis is to evaluate the degree to which accounting captures its underlying business reality; FS are inherently limited backward looking, not focusing on the future

Intermediate Financial Accounting Essay

5060 words - 21 pages CHAPTER 1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS IFRS questions are available at the end of this chapter. TRUE-FALSE—Conceptual Answer No. Description F 1. Definition of financial accounting. T 2. Purpose of financial statements. T 3. Definition of financial accounting. T 4. Capital allocation process. F 5. Objective of financial reporting. T 6. Decision-Usefulness approach. T 7. Users of financial statements

Acc 460 Week 3 Learning Team Ch. 4 & 6 Textbook Problems

603 words - 3 pages 1–4, found at the beginning of the Problems section at the end of the chapter. For this assignment, use the CAFR your team selected in Week Two. ACC 460 Week 3 Learning Team Ch. 4 & 6 Textbook Problems ACC 460 Week 3 Learning Team Ch. 4 & 6 Textbook Problems Product Description Resources: Ch. 4 & 6 of Government and Not-for-Profit Accounting Prepare written answers to the following problems from Government and Not-for

Acconting Essay