chapter 14 - CHAPTER 14 SYNTHESIS: SIGNIFICANCE AND...

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14-1 Odd-numbered Solutions CHAPTER 14 SYNTHESIS: SIGNIFICANCE AND IMPLICATIONS OF ALTERNATIVE ACCOUNTING PRINCIPLES Questions, Exercises, Problems, and Cases: Answers and Solutions 14.1 See the text or the glossary at the end of the book. 14.3 This question gets to the issue of uniformity versus flexibility in generally accepted accounting principles. One might argue that when the economic effects of a transaction on two firms are the same, the firms should use the same accounting method for the transaction. The firms should not have latitude to choose from among several alternative methods. On the other hand, when the economic effects of a transaction on two firms are different, the firms should have latitude to use different accounting methods. GAAP should not compel the firms to use the same method and inaccurately report the economic effects. In both cases, the economic effects should drive the degree of uniformity versus flexibility. 14.5 This question relates to the use of the cash basis versus the accrual basis of accounting. Chapter 3 discussed the deficiencies of the cash basis of accounting as a periodic measure of operating performance and the benefits of the accrual basis (more timely recognition of revenue, better matching of expenses with associated revenues). One of the "costs" of the accrual basis, however, is that it requires the allocation of revenues and expenses to periods of time. These allocations are the subject content of generally accepted accounting principles. 14.7 Net income over long time periods equals cash inflows minus cash outflows other than transactions with owners. Alternative accounting principles affect merely the timing of revenue and expense recognition. One accounting principle may report high revenues and expenses in early years and another accounting principle may report high revenues and expenses in later years. The first accounting principle produces higher (or lower) earnings in each of the early years as well as cumulatively. At some point, the second accounting principle produces higher (or lower) earnings in each year but the first method continues to report higher (or lower) cumulative earnings until earnings under the second accounting principle catch up.
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Odd-numbered Solutions 14-2 14.9 There are two responses to this question: 1. If the market reacts quickly and unbiasedly, then someone does the analysis. Sophisticated security analysts who trade continually in the markets likely perform the financial statement analysis. 2. There are settings outside of the organized securities markets where financial statement analysis is beneficial. These include banks lending to business customers, governments contemplating antitrust actions, labor unions considering negotiating strategy, and so on.
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chapter 14 - CHAPTER 14 SYNTHESIS: SIGNIFICANCE AND...

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