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UNIT 8B ACCOUNTING ANALYSIS_MORE SPECIFIC ISSUES

UNIT 8B ACCOUNTING ANALYSIS_MORE SPECIFIC ISSUES - period....

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Stock options allow employees the right to purchase  company stock as a set price over some fixed time  period. The most common price is closing market  price at issue date. At this price, no compensation  expense is recorded. SFAS No. 123 required increased disclosure on  options, but no compensation expense (has  changed) SFAS No. 123R now requires companies to  expense stock option benefits as compensation. 
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Stock options should match the incentives of the  agents (managers & employees) to those of the  investors (principals) Company now must record a compensation  expense (and potential equity dilution exists) Employees benefit from stock appreciation,  without the risk of decline
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Dilution potential:  stock options  outstanding/common shares outstanding is a  measure of dilution potential (10% could be  used as a rule of thumb for significance) Net income-reported minus net income- pro  forma  a measure of “real” compensation  expense of options (10% of net income could  be used for significance)- Will now show on I/S
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Stock options are supposed to align the  incentives of managers with those of investors Recent scandals suggest that executives have  used earnings manipulation techniques to  maintain stock price & perhaps use insider  trading Stock options, dividends & Treasury stock– are  they related? Restating financial information based on stock  option disclosures
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Footnote disclosure on industry & geographic  segments Disclosure requirements based on SFAS Nos. 14  & 133 Materiality based on “10%” rules for (1) revenues,  operating profit & identifiable assets for industry  segments & (2) sales or identifiable assets for  geographic segments
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Limited information required Different disclosures by company Segment disclosures normally include sales,  operating income & identifiable assets
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