Week 1 Chapter 7 - 7 Accounting Principles Chapter STUDY...

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292 Chapter 7 Accounting Principles Scan Study Objectives Read Feature Story Read Preview Read text and answer Before You Go On p. 298 p. 304 p. 313 Work Demonstration Problems Review Summary of Study Objectives Answer Self-Study Questions Complete Assignments After studying this chapter, you should be able to: 1 Explain the meaning of GAAP and identify the key items of the conceptual framework. 2 Describe the basic objectives of financial reporting. 3 Discuss the qualitative characteristics of accounting information and elements of financial statements. 4 Identify the basic assumptions used by accountants. 5 Identify the basic principles of accounting. 6 Identify the two constraints in accounting. 7 Understand and analyze classified financial statements. 8 Explain the accounting principles used in international operations. The Navigator S T U D Y O B J E C T I V E S Feature Story CERTAINLY WORTH INVESTIGATING! It is often difficult to determine in what period some revenues and expenses should be reported. There are rules that give guidance, but occasionally these rules are overlooked, misinterpreted, or even intentionally ignored. Consider the following examples. Policy Management Systems , which makes insurance software, said that it reported some sales before contracts were signed or products delivered. Sunbeam Corporation , while under the control of the (in)famous “Chainsaw” Al Dunlap, prematurely booked revenues and recorded overly large restructuring charges. Ultimately the company had to restate its net income The Navigator
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293 figures, and Mr. Dunlap lost his job. Rent-Way Inc. , which owns a large chain of rent-to-own stores, saw its share price plummet from $23.44 to $5 within a week after it dis- closed what the company termed “fictitious” account- ing entries on its books. These entries included improper accounting for fixed-asset write-offs, and understating the amount of damaged or missing merchandise. Often in cases such as these, the company’s stockholders sue the company because of the decline in the stock price due to the disclosure of the misin- formation. In light of this eventuality, why might management want to report revenues or expenses in the wrong period? Company managers are under intense pressure to report higher earnings every year. If actual performance falls short of expectations, management might be tempted to bend the rules. One analyst suggests that investors and auditors should be suspicious of sharp increases in monthly sales at the end of each quarter or big jumps in fourth-quarter sales. Such events don’t always mean management is cheat- ing, but they are certainly worth investigating. The Navigator Inside Chapter 7 When to Account for the Winning Handle Pull (p. 301) How About Instant Access?
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