intermediate accounting Chapter 1

intermediate accounting Chapter 1 - TheEconomicand...

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Revsine/Collins/Johnson: Chapter 1 The Economic and  Institutional Setting for  Financial   Reporting
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2 RCJ: Chapter 1 © 2005 Learning objectives 1. Why financial statements are a valuable source of information. 1. Why analysts (including auditors) use financial statements. 1. How accounting rules are established, and why those rules still allow managers some accounting discretion. 1. How the demand for financial information comes from its ability to improve decision making and monitor managers’ activities. 1. How the supply of financial information is influenced by cost and benefit considerations.
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3 RCJ: Chapter 1 © 2005 Why financial statements are  important Without adequate information, investors cannot properly judge the opportunities and risks of investment alternatives. Financial statements are often the best source of information about a company’s past performance, current health, and prospects for the future. Analytical tool Management report card Early warning signal Basis for prediction Measure of accountability Financial statements can be used for various purposes:
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4 RCJ: Chapter 1 © 2005 Epilogue to WorldCom In June 2002, WorldCom says $3.8 billion in line cost expenses were wrongly transferred to the balance sheet. Shares fall to $0.06. $11 billion of improper transfers are eventually uncovered. In July 2002, the company declares bankruptcy. $3.8 b ? FUTURE BENEFITS NO FUTURE BENEFITS ASSET EXPENSE
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5 RCJ: Chapter 1 © 2005 Lessons learned Financial statement fraud is rare—but investors, analysts and others should not simply accept the numbers at face value.
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