ch03 - JWCL006_c03_073-105.qxd 4/2/08 7:53 PM Page 73 Team...

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©CORBIS DIGITAL STOCK Measurement, Mechanics, and Use of Financial Statements PART 2 Motorola Inc. successfully introduced its Razr cell phone and rode the product to years of growth and profit. However, according to the Wall Street Journal (April 27, 2007) the company struggled to find a successor phone as profit margins for the Razr dropped amid product commoditization and intense competition. Eventually, the company’s profits turned to losses, key management fled, the stock price dropped, and shareholder activists pushed for board seats and management changes. How do you measure profit margins? How can profits turn quickly into losses? How does management affect the financial statements? And how do investors respond to the present success but the future uncertainty of changing technology? These kinds of questions are addressed in Part 2 of this textbook. CHAPTER 3 The Measurement Fundamentals of Financial Accounting CHAPTER 4 The Mechanics of Financial Accounting CHAPTER 5 Using Financial Statement Information JWCL006_c03_073-105.qxd 4/2/08 7:53 PM Page 73 Team B WG XI :don't delete:PRATT:
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The Measurement Fundamentals of Financial Accounting CHAPTER 3 KEY POINTS The following key points are emphasized in this chapter: Four basic assumptions of ±nancial accounting. The markets in which business entities operate and the valuation bases used on the balance sheet. The principle of objectivity and how it determines the dollar values that appear on the ±nancial statements. The principles of matching, revenue recognition, and consistency. Two exceptions to the principles of ±nancial accounting measurement: materiality and conservatism. JWCL006_c03_073-105.qxd 3/18/08 11:39 PM Page 74 TEAM-B 204:JWCL006:ch03:
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Chapter 3 The Measurement Fundamentals of Financial Accounting 75 Microsoft Corporation released its new operating system, Vista, in January, 2007. But along with the new product, Microsoft adopted a new method for recording revenue on its Fnancial statements. In previous years, Microsoft would record up to 25% of the revenue from its Windows operating system over a period of three-and-a-half years to match the implementation of upgrades and add-ons. With Vista, though, the company will be recording 100% of the revenue when a copy of the operating system is sold, speeding up the timing of revenue hitting the Fnancial statements. How do companies recognize revenue, and how are the Fnancial statements affected? What might motivate management to recognize revenue early, and how might a company’s stock price react to such behavior? This chapter covers the measurement fundamentals of Fnancial accounting, which consists of the basic assumptions, principles, and exceptions underly- ing the Fnancial statements. The principles of revenue recognition are an important part of these fundamentals.
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ch03 - JWCL006_c03_073-105.qxd 4/2/08 7:53 PM Page 73 Team...

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