16-2 - C hapter 5 I. Control and Prediction a. Basic...

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Chapter 5 I. Control and Prediction a. Basic reasons financial accounting numbers are helpful i. Help monitor a company ii. Help predict a companies future b. Financial accounting numbers and management control i. Reasons creditors may be weary to loan money 1. Assets have been paid to shareholders in the form of dividends or purchases of outstanding stock 2. The co pledged to other creditors 3. The co is mismanaged c. Financial accounting numbers as prediction aids i. Past events are indicative of future II. Framework for using financial statements to predict future earnings and cash flows a. Reported vs true book values i. Financial statements do not reflect the company’s prospects within its business environment ii. The financial statements do not reflect important unrecorded events iii. Management prepares the reports in a biased manner iv. Book value + Adjustments for business environment, unrecorded events, management bias= true value b. Business Environment i. Financial statements look backwards instead of the future 1. What is the outlook of the future
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c. Unrecorded events i. Most assets are carried at historical cost, not current market prices 1. Ex: land bought at 1000 but value increased to 10000 d. Management bias i. Accounting numbers can chosen, so managers will choose what makes the company look best III. Reading and Studying the financial statements and footnotes a. Basic i. Read the audit report ii. Identify significant transactions iii. Read the financial statements and footnotes b. The audit report i. Seal of approval c. Significant transactions i. How they effect the income statements ii. Earnings persistence
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16-2 - C hapter 5 I. Control and Prediction a. Basic...

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