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Chapter 17 - Solution Manual

We disagree that companies should be allowed to

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We disagree that companies should be allowed to arbitrarily pick and choose which accounting approaches they wand and we do not believe that full disclosure in the notes is sufficient to allow for transparency of what is reported and thereby reduce the need to narrow the number of accounting alternatives. Under the Conceptual Framework, the most relevant information should always appear in one of the financial statements, provided that it meets the SFAC No. 5 criteria for measurement and recognition. Conversely, we believe that there should be a narrowing of accounting alternatives because full disclosure in the notes is not sufficient to curb potential management abuses. We believe that management should not be allowed to select an accounting alternative solely on the basis of its financial statement effect. The myriad requirements for full disclosure did not stop companies have not stopped management from managing earnings and even committing fraud – note the behavior of WorldCom and Enron.
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385 The Conceptual Framework states that reliable financial information is free from bias. Clearly the more accounting alternatives that management has to choose from, the greater the temptation and occurrence of earnings management and other forms of financial statement manipulations. Not only is greater standardization more consistent with freedom from bias, it also results in another desirable characteristic, comparability. According to the Conceptual Framework, useful information should not only be relevant and reliable, it should also provide comparability for one company over time and among companies. The selection of one accounting approach over another can have a material impact on the measurement of amounts reported in financial statements. For example, LIFO and FIFO can result in significantly different values reported in the balance sheet and income statement. LIFO inventory values can severely understate a company’s current assets while producing a significantly lower net income than FIFO or even weighted-average inventory values. Therefore the use of different methods causes confusion among the readers of financial statements and prevents meaningful comparison of statements of different companies. There is strong support in the profession for narrowing the areas of differences in accounting. Reduction in the number of alternatives may narrow the differences and thus lead to more comparability. We argue, the very purpose of GAAP is to narrow the range of acceptable accounting alternatives. Conceptual framework is intended to provide guidance to help the FASB select appropriate principles and rules of measurement and recognition. Furthermore, SFAC No. states that the Conceptual Framework should also provide a frame of reference for resolving accounting questions in the absence of a specific promulgated standard. Determine bounds for judgment in preparing financial statements. The result should be enhanced comparability WWW Case 17-11 The solution to this case requires a visit to the SEC’s home page at the time the case is assigned. Financial Analysis Case The answer depends on the company selected.
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